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Using the largest S&P 500 exchange traded fund as the measuring stick, here’s the tale of the tape (or woe) for the benchmark domestic equity gauge: down 11.45% for the week ending April 8, down 15.23% year-to-date and 19% below its 52-week high. That’s just 1% removed from bear market territory.
Accounting for each of those ominous data points, it’s understandable that clients and investors are jittery while focusing more the market’s near-term gyrations than the inherent in strong planning and investing for the long-term. So in times like these, it’s also understandable that market participants aren’t paying much attention to market history.
Still, this an appropriate time to remember the old saying market history not being guaranteed to repeat but it often rhymes. Investors should hope the S&P 500’s post-correction (a drop of 10% or more) repeats or rhymes this time around because precedent indicates the index is more likely to rebound in the months following a correction than it is to continue faltering.
History Matters
As noted above, history isn’t guaranteed to repeat and there are examples of stocks entering corrections only to go onto full-fledge bear markets and worse. Time will tell if the current state of affairs improves or gets uglier, but history augurs well for those betting on improvement.
Since 1928, there were 25 instances in which the S&P 500 dropped 10% or more from its all-time high. Over the subsequent three-, six-, 12- and 24-month periods, the gauge rebounded from those declines more often than it continued faltering as highlighted in the chart below courtesy of State Street Global Advisors (SSGA).
It’s also worth noting, though there are no promises of this repeating , that S&P 500 reversals from 10%+ declines often happen quickly. That could be at least one sign that’s merit in remaining invested and it’s also a reminder that market timing is a fool’s errand.
“The main take-away is that on average, the index has positive returns over all subsequent periods. For periods that had subsequent positive returns, the 10% pullback ends up being fully reversed on average, even after just 3 months,” notes SSGA.
Advisors Matter, Too
With the current environment being one that tests investors’ nerves, advisors become all the more important. Not so much because of specific investment, but more so to impart upon clients that their financial plans are built to endure near-term shocks and such events are not infrequent over the course of market history.
Likewise, now is an excellent time to help clients keep things in perspective and for those with significant cash reserves, have conversations about preparing to bring some of that capital off the sidelines – potentially sooner than later.
“The point of this is not to dismiss the real possibility of further drawdown, particularly in the aftermath of a higher than expected tariff announcement by President Trump,” concludes SSGA. “Instead, we wanted to acknowledge that 10% corrections don’t have to be devastating to the portfolio. In fact, the hit rate and average forward return skews to the positive.”
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