Stock Market Correction
The stock market, as measured by the S&P500 entered correction territory last week by selling off more than 10% from its high. This the first time this has occurred since the selloff caused by the pandemic in March of 2020. While stocks generally moved higher without a lot of drawdowns last year, it’s important to remember that historically within any given year, there has been a 14% drawdown on average from peak to through for stocks. Often investors can feel inclined to sell their stocks as it is uncomfortable to see your portfolio decline, but doing so locks in selling at a lower amount. Taking a look at past corrections allows you to see that this is the time to remain disciplined. For example, if you look at the Dow Jones, which has the longest running set of data for stocks, we can see that after a correction, the Dow is up an average of 8.7% a year later:
Looking at recent corrections and the last 20 times the Dow sunk by 10%, the market has been positive a year later 75% of the time. So while we can’t predict the future, it’s important to think about what may be more likely to happen.
As you’re probably aware, Russia has invaded Ukraine with the plan to overtake their government. This caused a shock to the stock market which was already lower year-to-date. With this event, our team felt it would also be prudent to review and convey how the stock market reacted to past Geopolitical events and to see how they affected market returns. This data that we looked at actually proved to be more favorable than the market correction data that we looked at earlier in this writing with the S&P 500 positive 1 year later 83% of the time. Again, it may prove to be more likely than not that markets will be higher a year from now. Research from Goldman Sachs suggests that a “direct impact on global growth from weakness in Russia or Ukraine would likely by limited.” A look at more recent political events and how the markets reacted over a 3 month period after the event ended can be seen below:
While human instinct has investors want to sell to stop any possible future losses, this nature may likely leads investors to miss out on future gains. Additionally, if someone sells their stocks, they’d have to also decide, when to get back in? Being able to time this correctly can likely only be done with luck rather than skill. The long-term trend of the market tends to be higher with the S&P500 providing a total return of around 10% annually, including all of the dips. At CRA, we set clients up with well diversified portfolios because we recognize that there are times the market will decline and this is a client’s best defense against a down market. As a firm, we look forward to continuing to partner with you and coach you through the challenging times.
Respectfully Submitted CRA Investment Committee:
Matt Reynolds, CPA, CFP®, Co-Founder
Tom Reynolds, CPA, Co-Founder
Robert Martin, CFA, CFP®, Partner
Jeff Hilliard, CFP®, CRPC®, Financial Planner
Gordon Shearer Jr. CFP®, Financial Planner
Joe McCaffrey, CFP®, Financial Planner
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