After a turbulent 2015, stocks tumbled in the first few weeks of 2016, causing concerns that the bull market we've enjoyed since 2009 may be over. We'd like to take the opportunity to help you put market corrections in perspective.
Market Corrections Are Normal
Plagued by worries about global economic growth, the S&P 500 dropped 7.75% in the first two weeks of 2016. While the pullback surprised many investors, corrections in the 5-10% range are not unusual.
Since 1928, the S&P 500 has experienced corrections of more than 5% about three or four times each year. We see declines of 10% or more every 1-1/2 years, and bear market corrections of 20% or more about every three or four years. Obviously, these are all averages and the performance of any single year can deviate significantly from historical norms.
A Correction Was Widely Predicted
We are in the mature stage of the bull market that began in March of 2009. At this point in the market cycle, volatility and corrections are quite normal. After six-plus years of solid stock performance, analysts all but knew that a correction had to come.
Stocks have been trading near historic highs for months. In May of 2015, the S&P 500 closed at a new historic high.
Since then, stocks have been stuck in a volatile pattern, struggling to make headway. Once equities get near market tops, traders become hard-pressed to find any upside, and investors don't want to add any new money to push the market higher, causing a pullback. How far equities decline depends on a lot of factors, including investor sentiment, corporate earnings, economic data, and growth prospects for the near future. Disappointing news out of China reignited concerns about global growth and triggered the most recent selloff; however, domestic indicators show that the U.S. economy is still on track for modest growth this year.
While we can't predict the future, we can look back at past market declines for hints of what we might expect going forward if markets follow historical trends. Since 2009, pullbacks of 5% or more have lasted an average of about a month, peak to trough, meaning that the recent correction may continue. Market volatility is still high and it's unclear how headwinds from China and oil price declines may affect market performance in the coming weeks. While we're not likely to get any optimism out of China any time soon, it's quite possible that investors will find their footing and buy the dip, sending markets higher again.
What Happens If We Enter a Bear Market?
Historically, markets don't typically enter bear territory without being accompanied by a recession, and we just don't see that recession fears are justified. However, as professional investors, it's our job to prepare for contingencies and we're ready for a sustained pullback if it comes.
The most important thing is not to give in to emotion. While it can be tempting to eject when you see everyone heading for the exits, impulsive decisions can be a killer when markets decline. If you're feeling nervous, please give us a call so that we can discuss your portfolio strategy.
We can't predict bad markets. However, we have worked with you to develop a customized investment strategy that takes into account market declines and balances risk against the need for long-term growth. Markets fluctuate over time and the best response is careful analysis and prudent shifts where necessary.
While indexes like the S&P 500 and Dow Jones Industrial Average may be down, there are sectors, industries, and asset classes that are still undervalued or fairly valued given the economic and market conditions. As financial professionals, we are constantly on the hunt for opportunities to help our clients pursue their goals in challenging market environments.
Though market corrections are rarely welcome, they are a natural part of the overall business cycle and it's important to take them in stride. Declines also provide an environment to test your risk tolerance and ensure that your financial strategies and asset allocations are aligned with your long-term objectives and appetite for risk.
As professional investors, we've learned to seek out the opportunities in market corrections and volatility. While we can't use the past to predict the future, history tells us that having the patience to sit out brief rough patches often benefits our clients in the long run.
We hope that you have found this information educational and reassuring. If you have any questions about market corrections or are concerned about how volatility may affect your portfolio, please give us a call; we're always happy to speak with you.
Zack Alkhamis, CRPC, CIS, CFS, CES
Matthew Jarrell, CIS, CFS
Timothy A. McAfee, CPA, CFP, MST