December 11, 2018 Market Correction Perspective: When day to day volatility and fear grip the markets, it can make sense to take a step back and look at a broader, longer term perspective. In recent years, volatility has been uncommonly low. However, history has shown that the 10% average return that stocks have provided over the past 200 years has typically come with high levels of volatility.
Where Are We Now? We are in the midst of a correction, defined as a pullback of 10% or more from recent highs. While corrections and bear markets are no fun, they do occur somewhat regularly. A look at our “Correction Scorecard” below highlights the decline stocks have experienced from their 2018 US all-time highs. By recent historical standards, this year’s intra-year decline has been in line with the -13.8% average. Time will tell if Monday’s recent low will contain the downside move or not. Currently we are rallying off of that low.
History as a Guide: While 2018’s intra-year equity declines are in line with historical average percentages, these pull backs are still painful. However, despite painful intra-year declines, stocks typically finish a year with positive returns over 75% of the time (see JP Morgan chart and analysis below). Over the long history of the S&P 500, dating back to 1970, stocks have advanced closer to 80% of the time.
To get the benefits of higher returns, a certain level of risk must be accepted. Each investor has their own risk/reward equation which relates to their risk tolerance and goals and translates into having the appropriate asset allocation. Corrections are part of the price we pay on the path to higher returns. These are excellent times to have risk tolerance discussions and make sure you are appropriately allocated.