Broker Check

Market Correction Territory

March 09, 2020

As the headlines are reporting, the equity market has entered correction territory. By definition, “correction” means it has closed 10% below its previously established record high close. Corrections are a common occurrence. The chart below illustrates the average annual drawdown from peak to trough in the S&P 500 since 1980 has been 13.5%. Most people equate volatility with downside risk when in fact markets are most volatile to the upside. You can see from the chart that only 9 out of the last 40 years have ended negative. The current decline may ultimately equal that average annual drawdown, or it may be more, or less. Regarding this correction’s ultimate depth, we can make two important observations: (1) No matter how many talking heads opine in the media, it cannot be predicted. (2) To long-term, goal-focused investors, it does not matter.

We would encourage those of you still in the accumulation phase of your investing careers to regard this as an opportunity to accumulate shares at marked-down prices. For those of you drawing on your investments in retirement, remember that your portfolio is allocated to cash and bonds in addition to the stocks. These lower return asset classes are used for the very purpose of providing you with short-term liquidity needs until the stock markets recover.

Lastly in the final two charts, we would like to make you aware of the fact that market recoveries typically happen faster than corrections, and the negative impact of missing just one week of a recovery. Market corrections have typically lasted 5 months on average, while average recoveries only took 4 months.  The other important average that we will highlight is that investors who missed just one week of a recovery after a 2% or more selloff has ended up with half as much as the investor that stayed invested throughout the entire market cycle.  

As always – Please do not hesitate to call or setup a time for us to visit if you would like to discuss any further.