Such is often the case with market corrections. They tend to happen quickly, and they tend to be over just as quickly. We all heard the anecdotal reports that investors have been clamoring for this market correction. Many had reasoned that the markets had gone too far, too fast, and didn’t provide them with the opportunity to deploy new capital into the equity markets. It remains to be seen if the phones are now ringing off the hook at the nation’s broker-dealers today.
Prior to 2017, I used to be able to say, “Since 1980, there has been a greater than 5% correction in every year but one, 1995.” Now I get to say, “Since 1980, there has been a greater than 5% correction in every year but two, 1995 and 2017.” It just so happens that the market waited until February 2018 to do what it does in almost every calendar year. Investors can be reminded that corrections happen almost every year, but they still struggle to stick to their investment plan as they watch their personal accounts lose 10%, 15%, or even 20% of their value.
Market Correction History Lesson
Some historical context may help alleviate investors’ current and future concerns.
- Over the past 30 years, there have been 15 periods when climbing 10-year rates have resulted in 5% or greater market drawdowns. Over that time, the median interest rate increase is 75 basis points (bps) over a median 78 days. We are currently experiencing episode number 16. As of February 5, 2018, this cycle’s trough-to-peak move of interest rates was 80 bps over 107 days.1
- The S&P 500 Index has experienced drawdowns in such periods, typically ranging from 5% to 10%. The average U.S. equity market decline is 9.5% over 31 days. The median decline is 7.7% over 28 days. Viewed through that lens, the 2018 correction is fairly standard. Exhibit 1
- Six months from the beginning of the equity market decline, the median return of the S&P 500 Index is 3.4%; 12 months from the beginning of the equity market decline, the median return of the S&P 500 Index is 13.3%. Exhibit 2
I’d be remiss if I didn’t mention historical market returns following sharp bouts of volatility. In the past, when the CBOE Volatility Index (VIX) has spiked above 25, markets have returned, on average, 6.9% in the subsequent three months.2
All of this may sound a little bit like another character from “Anchorman,” Brian Fantana, who observed, “They’ve done studies, you know. 60% of the time, it works every time.”
The main point is that market corrections are common and typically only create losses for those who sell. Historically, markets tend to be above the pre-correction highs within months.
So let’s not be like Ron Burgundy in a “glass case of emotion.” Instead, let’s use history as our guide to stick to our long-term investment plans.
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