Last year was exceptionally difficult for many investors. The S&P 500 slipped into a bear market on the very first trading day of 2022, dragged down by economic uncertainty surrounding the worst stint of inflation in four decades and the subsequent interest rate hikes imposed by the Federal Reserve. The index ultimately fell 19.4% over the course of the year, marking its worst annual performance since the Great Recession in 2008.
Fortunately, there is reason to believe this year could be better. Here’s what investors should know.
History says the S&P 500 could rebound sharply in 2023
The S&P 500 has only seen an annual decline of more than 19.4% three times since its inception in 1957, and each of those drawdowns was set in motion by severe economic headwinds.
In 1974, the S&P 500 dropped 29.7% in response to double-digit inflation brought on by an oil embargo against the United States. In 2002, the index tumbled 23.4% as fallout from the dot-com bubble spilled from the tech sector into the broader economy. And in 2008, the index plunged 38.5% as the collapse of the U.S. housing market spiraled into a global financial crisis.
What happened next is interesting. In all three cases, the S&P 500 skyrocketed in the years immediately following those steep losses, producing an average return of 27.1% in 1975, 2003, and 2009. There is no guarantee the same type of rebound will take place in 2023 — each drawdown is precipitated by unique events — but history says a spectacular recovery is possible.
Whether the market rebounds or not this year, it is still a great time to buy an S&P 500 index fund.
The surefire index fund to buy
The Vanguard S&P 500 ETF (VOO -1.25%) tracks the performance of the S&P 500, a broadly diversified index comprising 500 of the largest U.S. companies. Its constituents span all 11 market sectors, and they represent a blend of value stocks and growth stocks. Put another way, the S&P 500 is a collection of the most influential American businesses, the very heart of the U.S. economy, and the Vanguard S&P 500 ETF allows investors to buy a slice of all of those businesses at once.
For that very reason, Warren Buffett — a staunch believer in American ingenuity — has often said an S&P 500 index fund is the most sensible option for investors that want exposure to the stock market. He explained his logic in Berkshire Hathaway‘s 2015 letter to shareholders: “For 240 years it’s been a terrible mistake to bet against America, and now is no time to start. America’s golden goose of commerce and innovation will continue to lay more and larger eggs.”
Indeed, the Vanguard S&P 500 ETF has been an excellent investment in years past. It produced a total return of 223% over the past decade, or 12.4% annually. At that pace, $100 invested on a weekly basis would grow into $1.3 million over 30 years. That makes the Vanguard ETF a great option for long-term investors, but there is one more compelling reason to own the index fund.
The S&P 500 (and its predecessor) have produced a positive return over every rolling 20-year period since 1919, according to Crestmont Research. That means anyone that bought an S&P 500 index fund (or its equivalent) at any point in the past century made a profit, as long as they held the fund for at least 20 years. That’s why the Vanguard S&P 500 ETF is a surefire buy right now.
Trevor Jennewine has positions in Vanguard S&P 500 ETF. The Motley Fool has positions in and recommends Berkshire Hathaway and Vanguard S&P 500 ETF. The Motley Fool recommends the following options: long January 2023 $200 calls on Berkshire Hathaway, short January 2023 $200 puts on Berkshire Hathaway, and short January 2023 $265 calls on Berkshire Hathaway. The Motley Fool has a disclosure policy.