Market Corrections Are More Common Than You Might Think

 

Market Corrections Are More Common Than You Might Think

The S&P 500® Index fell into "correction" territory in the final days of February, closing more than 10% below its last all-time high reached earlier in the month. February's turbulence brought the first correction since the fourth quarter of 2018 and the fastest-ever 10% correction, with the decline occurring over a mere six trading days.

Corrections can cause a lot of anxiety. However, it's important to recognize that financial markets have historically seen a significant pullback at some point during most years while still delivering positive returns over the full year. For example, in 2018, the S&P 500 saw a market correction of more than 10% in the first quarter of the year and again in the fourth quarter, followed by a rebound of more than 13% in the first quarter of 2019.

 

These market corrections are more common than you might think. Over the five years since Schwab Intelligent Portfolios® was launched in March 2015, there have been five corrections including the most recent one. These occasional pullbacks have historically been followed by rebounds, according to the Schwab Center for Financial Research. Since 1974, the S&P 500 has risen an average of more than 8% one month after a market correction bottom and more than 24% one year later. Investing in a diversified portfolio and maintaining the discipline to stick with your longer-term plan through these periods of volatility are among the keys to investment success.

 

Stock market corrections are not uncommon

To illustrate the volatile nature of financial markets, we took a look at intra-year stock market declines over the 20-year period from 2000–2019. As you can see in the chart below, a decline of at least 10% occurred in 11 out of 20 years, or 55% of the time, with an average pullback of 15%. And in two additional years, the decline was just short of 10%. Despite these pullbacks, however, stocks rose in most years, with positive returns in all but five years and an average gain of approximately 6%.

 

Figure 1: Stock market corrections are fairly common. Pullbacks of 10% or more occurred in 11 of the past 20 years

Having a longer-term plan and sticking to it is key to investment success

The current bull market is nearing its 11th anniversary, with the S&P 500 having more than quadrupled in value from its March 2009 low through the end of February 2020—even after its recent pullback. Schwab's outlook has become more cautious in recent months amid uncertainties around the coronavirus, cuts in corporate earnings estimates and concerns about the strength of economic growth. A bear market of at least a 20% decline will occur at some point, but it's important to keep them in perspective. The average bear market has lasted only about 17 months, according to the Schwab Center for Financial Research, and 80% of corrections since 1974 have not led to a bear market.

 

It remains to be seen whether the recent market volatility has reached its crescendo or whether the turbulence might continue. Either way, it's important to remember that market pullbacks are not uncommon — and occur in most years. These market corrections can be healthy in resetting stock valuations and investor expectations within a longer-term market advance. We know that markets can be volatile in the short term. But we also understand that having a long-term strategic asset allocation plan and sticking to that plan through periods of market volatility can help keep you on the right track toward reaching your financial goals.

 

Schwab Intelligent Portfolios is designed to provide broad diversification across up to 20 asset classes in any portfolio, including defensive asset classes such as cash and gold that can help you withstand these inevitable periods of volatility. This broad diversification along with an automated rebalancing process can help provide the discipline to remain calm during short-term volatility while staying focused on longer-term objectives.