Reasons Not to Worry About Market Corrections
Reasons Not to Worry about Market Corrections
By Steve Tuttle, Chief Investment Strategist, Signet Financial
When the market falls a little, investors worry it’s going to fall a lot. The reasons change and the stocks differ, but the feelings are always the same. Every correction seems like the start of something bigger.
2021 is starting off with this same pattern. People are anxious. Yet history tells us that most market corrections do not lead to lengthy bear markets.
Here are some charts of the S&P 500 from the last decade that might help put things in perspective. Every chart looks ugly… like the start of a bear market. None were. In each case, markets rebounded and rewarded investors who remained invested.
Spring 2012- Poor US jobs reports and slowing growth in emerging markets including China and India
2014 – Ebola scare
2018 – US-China trade war, US bank liquidity concerns
Spring 2020 – Actually, this was a crash, but that was a pandemic induced bear.
But how about the fall of 2020, which saw election concerns and fears of a re-test of market lows.
In each of these instances, there were legitimate concerns facing investors. While the reasons for corrections are never the same, the reaction from investors is often very similar. Greed turns to fear as stock markets are temporarily driven by emotion, rather than fundamentals. This inevitably leads to periods of extreme turbulence in the stock market.
We believe longer trends have biggest impact on your returns.
If you look at the market from a broader view, the perspective is much different. The corrections look very shallow and temporary. They have very little impact on long-term returns. The chart below clearly shows the trend is up and to the right.
Source: Koyfin, Trailing 10-year price chart, SPDRS&P 500 ETF (SPY)
Don’t let volatility disrupt your financial plan.
Markets go through scary declines nearly every year. The chart below shows that despite intra-year declines each year, markets finished higher in 9 of the past 10 calendar years.
Source: Morningstar, JP Morgan
Staying invested, even during times of stress, is the best way to reach your financial goals.
Like every decade, there have been a handful of pullbacks and corrections over the last 10 years. Yet only 1 led to a decline greater than 20%. Markets have rewarded investors who can endure some short-term declines and remain invested over the long-term.
This is not a recommendation to ignore risk or get more aggressive now. It is a reminder that pullbacks happen unexpectedly and often. Expect them.
Every time stocks fall a little, it is natural to feel like they’re due to fall a lot. But they rarely do.
Signet can help you better cope with future periods of market volatility.