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Perspective for Corrections, Bear Markets and a War Thumbnail

Perspective for Corrections, Bear Markets and a War

A rough start to 2022 for global stock and bond markets. Stocks have dropped with the S&P 500 in correction (-10% or greater) and Nasdaq in a bear market (-20% or greater), with (now realized) fears about Russia invading Ukraine and the recognition that inflation is a more persistent problem than the Federal Reserve had previously let on, which means some combination of faster rate hikes or a higher ultimate peak for short-term interest rates, or both. Add in the November U.S. Mid-Term elections, there is a lot of uncertainty for the markets to digest. Markets move on confidence and without it, there are no new buyers. 

For Sandbox clients, we are making investment decisions based on time horizons, risk tolerances and financial goals.  For some clients, we are playing defense, for others we are playing offense and for many, we are sticking to the original investment plan.  For many investors, you have lived through these market cycles and tenuous events in the past, and although each feels very different, the result tends to be similar. Two charts below that we thought were important enough to share.

Every severe market correction feels like the world is about to unravel, this one feels no different. Someday in the future, it will not feel this way and prices will be in a very different place.  

1. SELL the news and BUY the invasion?

This is counter to what many think. In fact, many might logically believe that uncertainty from conflict means “risk off” until the conflict ends. This is not the case. 5 of 5 times, stocks have bottomed just before or at the invasion. 

2. Corrections are Normal, will it get Worse?

With the S&P 500 Index officially in correction territory, a friendly reminder that on average, there are 1.1 declines of at least 10% per year. The odds of it turning into a 15% drop are 45%. A look at the data on the S&P 500 since 1928 show that the probability of stock market getting worse from these levels are low. 

3. Stocks Tend to Do Well After Corrections

The S&P 500 officially moved into correction territory on Feb 22, which becomes the 33rd correction or bear market since 1980. They are all painful but looking forward, there are greener days ahead. The statistics from LPL Research show 1-year later has a median return of +25% and is higher 86% of the time. 

Perspective and education are vitally important during difficult markets. We strive to be transparent and communicate during times of financial stress. Below we provide links to some past commentary and charts that will help frame the current environment and provide some perspective.  Although these corrections occur for different reasons, the results often end in the same manner. 

  • When the Stock Market Plunges, Remember to Keep Perspective (February 1, 2022) - Read here
  • Comments on the Market Correction (January 25, 2022) - Read here
  • The Stock Market is Flat, a Good Lesson for Investors (May 26, 2020) - Read here
  • When is the “Right Time” to Buy Stocks (March 20, 2020) - Read here