While the investment landscape can always be challenging to navigate, there are currently a multitude of factors driving stock market volatility. Be it high inflation, the prospect of the Federal Reserve raising interest rates, or the Ukraine-Russia crisis, 2022 has brought elevated volatility not seen since the arrival of COVID-19. As a result, we have now seen our first market correction since March of 2020. So where do we go from here? In this blog we will explore what kind of volatility the market experiences on average, how the market tends to perform following a correction, and how the market has historically performed in times of war.
Market Volatility and How Markets Perform Following a Correction
First, let’s take a quick view of year-to-date returns for various equity market indices through Friday, 2/25/22:
- S&P 500: -7.80%
- Dow Jones Industrial Average: -5.99%
- NASDAQ Composite: -12.37%
- Russell 2000 (U.S. Small Cap Stocks): -8.99%
- MSCI EAFE (International Stocks): -6.58%
As you can see, the major market indices are all down thus far in 2022, with deeper losses in the more volatile indices like the tech-heavy NASDAQ and the small-cap Russell 2000. At their low points, the NASDAQ and Russell 2000 reached bear market territory, a decline of 20% from the highs.
Coming off the bottom of the COVID-19 induced bear market (March 23rd, 2020), the markets have had a robust climb higher with minimal volatility. To that point, 5% was the largest dip experienced by the S&P 500 in 2021. For comparison, the current correction reached about 12% before rallying into the end of the week, ending February 25th. How does all this compare to an average year for the S&P 500?
Since 1980, the S&P 500 has averaged an annual intra-year decline of 14%.Despite these average intra-year declines, the S&P ended positive 76% of time, or 32 of the 42 years.¹ Knowing what occurs in a typical year, one could argue that a correction was overdue given the S&P 500 returned nearly 50% from the start of 2020 through the end of 2021.
Understanding that a market correction should be expected each year on average, and that market still ends positive approximately 76% of the time, corrections bring opportunity.In the 32 market corrections since 1980 (excluding this current correction), on average the S&P 500 has a return of 24.8% one year after the bottom and 37.4% two years after the bottom.²
Market volatility and declines are never welcome but are nonetheless a natural part of being an equity investor. Market corrections can often be considered “healthy” in many instances and are a mechanism to keep equities fairly valued.
Markets During War Times
It would be natural to question the prior data presented with the horrible scenes coming out of Ukraine, following the Russian invasion. While stock market volatility and corrections are normal and should be regularly expected, does that hold true during times of war?
When looking at past geopolitical events similar to the current situation in Ukraine, the market still shows impressive resilience. In fact, the average S&P 500 drawdown is “only” about 4.6% (with the steepest at 19.8% following the Pearl Harbor attack) and only takes about 20 days to reach its bottom. From there, the average recovery time to erase the decline is about 1.5 months (43 days).³ While we never want to see war and want to avoid it at all costs, it doesn’t tend to have a lasting effect on the market. In reality, these unwelcomed events tend to provide another strong buying opportunity.
Final Thoughts
In summary, it is quite natural to feel discomfort during volatile periods in the market. However, it is important as investors to understand the historical context around volatility and market corrections to help inform decisions. Using history as our guide, the data have taught us that corrections often present attractive opportunities. It is impossible to know with certainty where the markets go from here, but now is an ideal time to explore if you can take advantage of the current environment. Whether the opportunity is to rebalance the portfolio into stocks or to put sidelined cash to work, we encourage you to contact our office to explore your options.
References
² LPL Stocks Tend To Do Well After Corrections (found on Resource page)
³ LPL Stocks Usually Take Geopolitical Events In Stride (found on Resource page)
