Should you be concerned?
On Monday, the S&P 500 was down 10% from its recent highs.
Investors panicking, however, should keep long-term trends in mind.
It’s not unusual that we had a 10% correction; What is unusual is how long it is between corrections.
From February to March 2020, the S&P 500 fell about 33% before recovering.
Before that, the last 10% drop was in late 2018 when the Fed talked about an aggressive rate hike. That period — from late September to just before Christmas — caused the S&P 500 to decline 19%.
That’s two corrections of over 10% in the past three years and two months. This corresponds to a correction every 19 months.
While that sounds like a lot, it falls short of the historical norm.
5%-10% corrections are normal
In a 2019 report, Guggenheim noted that 5% to 10% corrections in the S&P have been a regular occurrence.
Since 1946 there have been 84 declines of 5% to 10%, which is more than one per year.
Fortunately, the market usually recovers quickly from these modest declines. The average time it takes to recover from these losses is one month.
Deeper declines have occurred, but they are less frequent.
Declines of 10% to 20% have occurred 29 times (about once every 2.5 years since 1946), 20% to 40% nine times (about once every 8.5 years), and 40% or more three times (every 25 years) .
Two takeaways: First, most pullbacks above 20% have been associated with recessions (there have been 12 since 1946).
Second, for long-term investors, it tells you that even relatively infrequent but severe pullbacks of 20% to 40% don’t last very long — just 14 months.
The S&P 500 goes up 3 out of 4 years
Another way to split the data is this: If dividends are factored in, the S&P is up 72% year over year since 1926.
That means the market is in decline about one year in four. It can (and does) stitch chains of down years together.
But that’s not the rule. In fact, the opposite is the case. More than half the time (57%), the S&P posts gains of 10% or more.
The Fed: Is This a Secular Shift in Stocks?
Could there still be a deeper, longer-term correction?
Even bulls admit the past 12 years have been unusually rich for market investors.
Since 2009, the S&P 500 has averaged returns of about 15% per year, well above historical returns of about 10% per year.
Many traders credit this five percentage point annual outperformance largely to the Fed, which has not only kept interest rates extraordinarily low (making cheap money plentiful for investors), but also injected vast amounts of money into the economy by expanding its balance sheet , which is now around $9 trillion.
If this is the case – and all or most of that excess profit is attributable to the Fed – then the Fed can be expected to drain liquidity and raise interest rates, which will account for a future period of below-average yields (below 10%). could .
That is Vanguard’s view. In its 2022 Economic and Market Outlook, the mutual fund and ETF giant noted that “the loss of political support poses a new challenge for policymakers and a new risk for financial markets.”
They described their long-term outlook for equities as “cautious,” noting that “high valuations and lower rates of economic growth mean we expect lower returns over the next decade.”
How much lower? They expect returns on a 60/40 stock/bond portfolio to be about half what investors have achieved over the past decade (from 9% to about 4%).
Still, Vanguard doesn’t anticipate negative returns; They just expect lower returns.
What does it mean when stocks are 10% off their highs?
You’ve been hearing it all Monday: “The S&P 500 is 10% off its highs!”
True, but how relevant is this for the average investor?
How many people do you know who invested all their money at a market top and got it all at the market bottom on Monday? Yes, many people panic at the bottom, but very few have ever invested all of their money at the top of the market.
Most people do some sort of dollar cost averaging, investing money over many years.
That means that when stocks go down, they’re almost certainly pulling back at a higher price than you paid for it.