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Market corrections, while common, are always unsettling. Investment strategists lose sleep too. In the midst of the recent global market selloff, I spent the wee hours reminding myself of what I’ve absorbed over the years about market corrections and volatility. Here are some important reminders to keep in mind if the selloff is causing you to lose sleep as well.
Here are 10 things to remember about market corrections and volatility:
1. Market corrections happen almost every year. Since the early 1980s, there has been a greater than 5% drawdown in the S&P 500 Index in every year but two (1995 and 2017).1
2. Market volatility and corrections do not emerge out of nowhere. They tend to be the result of policy uncertainty. The U.S. market has been expecting multiple rate cuts by the U.S. Federal Reserve (Fed), which have not yet emerged but are likely forthcoming.2
3. Of all the indicators, the bond market tends to get it right most often. The bond market is signaling that U.S. nominal growth (real economic activity plus inflation) may be weak. U.S. long rates have plunged.3 The 2-year U.S. Treasury has fallen by even more.4 The bond market is ahead of the Fed and intimating that multiple rate hikes could be imminent.
4. Market cycles don’t die of old age. They are typically murdered by the Fed with interest rate hikes. Herein lies the rub. Has the Fed kept interest rates high for too long, and what damage has it done to the global economy? Fortunately, many of the “early warning signals” that we track do not appear to be suggesting that a recession is imminent.
5. The corporate bond market has been the “canary in the coal mine.” Corporate borrowing costs relative to the risk-free rate tend to provide an early warning sign, rising significantly ahead of a recession. Currently, the spread between high-quality corporate bonds and the risk-free rate are rising but remain below average.5 In short, I believe the corporate bond market is signaling a worsening economic backdrop, but not a recession.
6. The stock market has historically recovered quickly from corrections. The average time to recovery from a 5%-10% downturn is three months. The average time to recovery from a 10%-20% correction is eight months.6
7. If a recession occurs, markets typically fall by more and take longer to recover. The average decline during the more-mild recessions of 1957, 1960, 1980, 1981, and 1991 is nearly 20%. The stock market recovered, on average, within one to two years.7
8. The best days in the market often happen near the worst days of the market. Investors likely know that returns can be significantly impaired if they miss the best days in the market, but they may not realize that the best and worst days tend to group together. In fact, of the 30 best days in the stock market in the past 30 years, 24 happened during the “tech wreck,” the Global Financial Crisis, and the Covid-19 pandemic.8
9. It’s typically been better to add to portfolios after severe down days. Long-term investors have usually been better served by adding to portfolios rather than by withdrawing money during corrections.9
10. Time in the market has generally been better than timing the market. On days when the headlines look dire, our action biases implore us to make changes to our portfolios. However, numerous studies, including one from Dalbar, concluded that investors who remained committed to their investment plans have typically fared better than those who have attempted to time the market.10
Brian Levitt is Global Market Strategist at Invesco and cohost of Invesco’s “Market Conversations” podcast.
Notes
1. Source: Bloomberg, as of 8/2/24, based on the S&P 500 Index.
2. Source: Bloomberg, as of 8/5/24, based on Fed Funds Implied Futures.
3. Source: Bloomberg, as of 8/5/24, based on the 10-year US Treasury rate.
4. Source: Bloomberg, as of 8/5/24.
5. Source: Bloomberg, as of 8/5/24, based on the Bloomberg US Corporate Bond Index option-adjusted spread.
6. Source: Bloomberg, as of 8/5/24, based on the Dow Jones Industrial Average Index drawdowns and market cycles since 1945.
7. Source: Bloomberg, as of 7/31/24, based on the S&P 500 Index and recession dates defined by the National Bureau of Economic Research: Aug. 1957 – Apr. 1958, Apr. 1960 – Feb. 1961, Dec. 1969 – Nov. 1970, Nov. 1973 – Mar. 1975, Jan. 1980 – Jul. 1980, Jul. 1981 – Nov. 1982, Jul. 1990 – Mar. 1991, Mar. 2001 – Nov. 2001, Dec. 2007 – Jun. 2009 and Feb. 2020 – Apr. 2020.
8. Sources: Bloomberg and Invesco, as of 8/5/24.
9. Source: Bloomberg, as of 7/31/24, based on S&P 500 Index returns since 1995. The analysis determines whether investors were better served by adding or withdrawing money following the 50 worst days in the market since 1995.
10. Sources: Dalbar, Bloomberg, as of 12/31/23. The study is based on a comparison of the return of the S&P 500 Index versus the average asset allocation investor return based on an analysis by DALBAR, Inc., which utilizes the net of aggregate mutual fund sales, redemptions, and exchanges each month as a measure of investor behavior.
Disclaimer
© 2024 by Invesco Canada. Reprinted with permission.
This does not constitute a recommendation of any investment strategy or product for a particular investor. Investors should consult a financial professional before making any investment decisions.
The opinions referenced above are those of the author as of Aug. 5, 2024. These comments should not be construed as recommendations, but as an illustration of broader themes. This does not constitute a recommendation of any investment strategy or product for a particular investor. Investors should consult a financial professional before making any investment decisions.
Forward-looking statements are not guarantees of future results. They involve risks, uncertainties, and assumptions; there can be no assurance that actual results will not differ materially from expectations. Diversification does not guarantee a profit or eliminate the risk of loss. All investing involves risk, including the risk of loss.
Diversification does not guarantee a profit or eliminate the risk of loss.
All figures are in U.S. dollars.
This does not constitute a recommendation of any investment strategy or product for a particular investor. Investors should consult a financial professional before making any investment decisions.
All investing involves risk, including the risk of loss.
Past performance is not a guarantee of future results.
In general, stock values fluctuate, sometimes widely, in response to activities specific to the company as well as general market, economic and political conditions.
Commissions, trailing commissions, management fees and expenses may all be associated with mutual fund investments. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated. Please read the simplified prospectus before investing. Copies are available from your advisor or from Invesco Canada Ltd.
Investment funds are not guaranteed and are not covered by the Canada Deposit Insurance Corporation or by any other government deposit insurer. There can be no assurances that any fund or security will be able to maintain its net asset value per security at a constant amount or that the full amount of your investment in the fund will be returned to you. Fund values change frequently and past performance may not be repeated. No guarantee of performance is made or implied. The foregoing is for general information purposes only. This information is not intended to provide specific personalized advice including, without limitation, investment, financial, legal, accounting or tax advice.
Image: iStock.com/Markus Wegmann
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