At WT Wealth Management, we anticipated weakness in the equity markets and discussed this with our clients over the course of the summer. Nobody should have been surprised. Early September through mid-October is a historically weak period for the equity markets.
That being said, since the most recent all-time high on September 2, the S&P 500 slipped fractionally more than 5% peak to trough through September 30. In other words, we have achieved the anticipated (and potentially refreshing) 5%+ pullback that every market observer watched for over the last several days. Now we can look past the 9th longest advance between 5%+ declines since WWII and start counting the days until the next one.
Pullbacks, Corrections and Bear Markets
Let's face it, market pullbacks (a decline between 5.0% to 9.9% from the market's peak1
) can be unnerving. But when investors understand that pullbacks are common occurrences in the equity markets, most declines become "ho-hum" moments. A 5%-10% decline can happen several times per year. The fact that the S&P 500 did not have a measurable retracement since pre-Election 2020 (9/2 to 9/23, -9.6% and 10/12 to 10/30, -7.5%) was quite unusual.
Historically, steeper declines aren't a cause for alarm either. Corrections (a decline between 10.0% to 19.9% from the market's peak1
) have an average recovery period of approximately four months. Corrections can occur as frequently as every 12-18 months. While corrections can be uncomfortable, they will not undermine a well-diversified portfolio. Investors with the proper long-term perspective should not panic.
Pullbacks and corrections are not typically associated with economic deterioration; more often they are a result of news-driven or technical-market events and do not represent a signal to deviate from your long-term plan. Bear Markets (a decline greater than 20.0% from the market's peak1
) usually coincide with measurable economic deterioration within the economy (aka recession) and take longer to recover. However, they are more infrequent only occurring 12 times in the past 75 years.
Lack of pullbacks or corrections could convince even the savviest investor to believe the markets only go up. That's very dangerous.
|Declines in the S&P (Since 1945)|
An important perspective on market pullbacks and corrections is gained by looking at post-World War II declines in the S&P 500 Index. As seen in the chart above, the majority of declines fall within the 5-10% range (i.e., pullbacks), with an average recovery time of approximately one month. Read that again, one month! And over 90% of all declines fell below 20%. So, an investor that is spooked by a 6, 7 or 8% decline and thinks like '70s sitcom legend Fred Sanford, "this is the big one", could very easily make an unforced error by changing their plan.
Context and history are important components to a proper perspective. As we have seen, pullbacks and corrections are necessary, healthy and usually short-lived. The uneasiness we all felt during September can be calmed with facts in hand. Pullbacks and corrections should not be a reason to panic, but rather serve as a catalyst to speak with your advisor. Having regular conversations with your financial advisor may help you better assess the potential impact on your portfolio and evaluate a proper course of action, if any, that is in line with your long-term investment objectives.
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