Should you be concerned?
The S&P 500 was down 10% from its recent highs on Monday.
Long-term trends should be considered by investors who are panicking.
We have had a 10% correction, but how long it has been betweencorrections is unusual.
The S&P 500 dropped in February and March of 2020.
The last 10% decline was in late 2018, when the Fed talked about raising rates aggressively.
In the last 3 years and 2 months, there have been two 10%+ corrections. A correction is done every 19 months.
That sounds like a lot, but it is below the norm.
5% to 10% corrections in the S&P have been a regular occurrence according to Guggenheim.
There have been 84 declines of 5% to 10% since 1946, which works out to more than one a year.
The average time it takes to recover from those losses is one month.
Deeper declines have happened, but they are less frequent.
| Decline | # of declines | Average time to recover in months |
|---|---|---|
| 5%-10% | 84 | 1 |
| 10%-20% | 29 | 4 |
| 20%-40% | 9 | 14 |
| 40%+ | 3 | 58 |
Since 1946, there have been declines of 10%- 20%, 20%- 40%, and 40% or more three times.
There have been 12 recessions since 1946 and most of them have been associated with pullbacks above 20%.
Second, for long-term investors, it tells you that even relatively rare but severe pullbacks of 20%- 40% don't last very long.
When dividends are factored in, the S&P has risen more than 70% of the time since 1926.
Roughly one out of every four years the market is down.
That is not the norm. More than half the time, the S&P posts gains of 10% or more.
| S&P 500 | % advance each year |
|---|---|
| 20%+ advance | 36% |
| 10-20% advance | 21% |
| 0-10% advance | 15% |
| 0-10% decline | 15% |
| 10%+ decline | 13% |
Could some deeper, longer-term correction be happening?
The last 12 years have been very good for market investors.
Since 2009, the S&P 500 has averaged gains of 15% a year, well above the historic returns of 10% a year.
Many traders attribute that 5-percentage-point yearly outperformance largely to the Fed, which has kept interest rates low and has pumped enormous amounts of money into the economy by expanding its balance sheet.
If that is the case, it is reasonable to assume that the Fed will withdraw its money and raise rates in the future, which will cause a sub-normal return.
That's the view of the other side. The removal of policy support poses a new challenge for policymakers and poses a risk to financial markets, according to the mutual fund giant.
They said that they expect lower returns over the next decade because of high valuations and lower economic growth rates.
They expect returns on a 60/40 stock/bond portfolio to be half of what they realized over the last decade.
They are expecting lower returns, but they are not expecting negative returns.
You heard it all day Monday, the S&P 500 is 10% from its high.
How relevant is that to the average investor?
How many people pulled their money out of the market at the bottom of the market on Monday? Many people panic at bottoms, but very few ever invest all their money at the market top.
Most people engage in dollar-cost averaging where they invest their money.
When stocks pull back, they are almost certainly pulling back from a higher price than you paid for them.
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