A History Lesson on Market Corrections
By Presidio Wealth Partners on August 8, 2024
Corrections Are Not Uncommon Occurrences
In times of uncertainty, we find it best to zoom out, look at the bigger picture, and put everything into perspective. Markets have been performing extremely well as of late, well above long-term averages. As it stands, the S&P 500 is up nearly 12% year-to-date and about 6% from its all-time high of $5,670 on July 16. Markets have rebounded nicely from Friday into Monday’s selloff, up 3% from Monday’s low. Since the start of 2020, the index is up over 60%, and up 28% since the start of 2023.[1] Historically, the stock market returns 7.7% per year, which has been beaten in seven of the last ten years.
Chart 1: Recent Markets Returns Have Been Above Historical Averages[2]
Intra-year volatility has also been quite muted relative to history. In the twenty-year period from 2002-2021, ten of those years (50% of the time) experienced a pullback of at least 10% with an average pullback of 15%. Despite those pullbacks, the stock market generated a positive return in 17 of those 20 periods.[3]
Intra-year market declines are not uncommon, and up until the last few weeks, we have experienced nearly zero extreme moves this year. July 24, 2024, was the first time in 356 trading days (518 calendar days) that the S&P 500 fell 2%, the third longest streak in 20 years.[4]
The below chart shows year-to-date daily returns up till July 17; since then, markets have experienced a wider array of returns. But visualizing this year’s daily returns before July 17 helps show just how low volatility has been relative to the previous four years.
Chart 2: The Dispersion of Returns has been Extremely Tight in 2024[5]
Maintain a Long-Term View
The market is near a “correction” phase, which is defined as a 10% drawdown but no more than -20%, which is considered a “bear market”. Only 26% of years experience a bear market, but 64% of years see a 10% or worse drawdown and 94% of years see a 5% or worse drawdown.[6] 10% drawdowns are not out of the ordinary and are more likely to occur than not in any given year.
Following steep market declines, stocks perform well on a forward-looking basis. Since 1974, the S&P 500 returns over 24% on average following a correction. And when it comes to bear markets, forward returns are even greater. On average, bear markets last 1/5th of the length that bull markets do. In times of high volatility and quickly changing narratives, it is important to stick to the fundamentals and find opportunities to invest in high-quality companies at cheap relative valuations.
Chart 3: Bull Market Lengths and Returns Greatly Outsize Bear Markets[7]
Chart 4: Stay Invested Through the Downturn to Benefit from the Recovery[8]
What Happens from Here
We shared our thoughts on the recent market activity in this week’s Market Note, “Finding Opportunities in Volatility”. We believe there are many factors at play, and it is too difficult to nail down the recent action to a single cause. When volatility spikes, it is important to analyze the environment and stay rational. Fundamentals and earnings are the most important factors to focus on through times of uncertainty. Markets may seem irrational in the short term, but whether it’s one week, a month, or a year from now, they will eventually reward the companies with strong fundamentals.
In times like today, we seek out high-performing companies that are trading below what we believe to be fair value. Some of our favorite themes that we are watching and or adding to in the decline are housing (especially as 30-year mortgage rates have fallen to levels last seen in April 2023), power and grid infrastructure, aerospace, cybersecurity, artificial intelligence, the PC upgrade refresh cycle, net interest income recovery across the banking sector, and the resilient consumer. In the coming weeks, we will be releasing a commentary series discussing in detail how we are positioned for these long-term themes.
In the short term, we continue to watch the data and look for spots to invest in quality companies.
[1] Source: FactSet. As of August 5, 2024.
[2] Source: FactSet. As of August 5, 2024.
[3] Source: Schwab. As of February 22, 2022.
[4] Source: Bloomberg. As of July 24, 2024.
[5] Source: Sherwood. As of July 17, 2024.
[6] Source: The Irrelevant Investor. As of August 5, 2024.
