Financial markets began 2022 with renewed volatility amid lingering concerns about inflation, expectations of Federal Reserve interest rate hikes, and rising geopolitical tensions over Russia and Ukraine. For more information on how geopolitical risk can affect markets, check out this market commentary update. In late February, the S&P 500® Index closed in “correction” territory, defined as a retracement of more than 10% from its latest all-time high. the recent turbulence was the most severe since the 34% drop that occurred in the first quarter of 2020.
market corrections can cause a lot of anxiety. Keep in mind, however, that the S&P 500 only measures one asset class, the US. uu. shares of large companies. schwab intelligent portfolios® diversifies across stocks, bonds, commodities and cash to help moderate overall portfolio volatility and drawdowns when equity markets become turbulent.
Reading: Market correction history
Furthermore, financial markets have historically experienced a significant pullback at some point during most years and continue to generate positive returns throughout the year. For example, in 2018, the S&P 500 experienced a market correction of more than 10% in the first quarter of the year and again in the fourth quarter, followed by a rally of more than 13% in the first quarter of 2019. and the decline in the first quarter of 2020 was followed by a positive return of 18% for the full year and a gain of more than 100% in less than two years.
These market corrections are more common than you think. In the seven years since Schwab Smart Wallets launched in March 2015, there have been five corrections and one bear market. a bear market is a retracement of at least 20% from a recent high.
These occasional pullbacks have historically been followed by rebounds, according to the Schwab Center for Financial Research. Since 1974, the S&P 500 has gained an average of more than 8% a month after a minimal market correction and more than 24% a year later. investing in a diversified portfolio and maintaining the discipline to stick to your long-term plan during these periods of volatility are among the keys to long-term investing success.
Stock market corrections are not uncommon
To illustrate the volatile nature of financial markets, we looked at year-over-year stock market declines over the 20-year period, from 2002 to 2021. As you can see in the chart below, there was a decline of at least 10% in 10 of 20 years, or 50% of the time, with an average retracement of 15%. and in two additional years, the decline was just under 10%. however, despite these setbacks, the stock was up in most years, posting positive returns in all but 3 years and an average gain of about 7%.
Figure 1: Stock market corrections are quite common. setbacks of 10% or more occurred in 10 of the last 20 years
source: morningstar direct, as of 12/31/2021. Past performance is no guarantee of future results.
Having a longer-term plan and sticking to it is key to investing success.
The last bull market brought gains of over 400% over 11 years. the current bull market has seen an advance of more than 100% in less than two years, following the shortest bear market (1 month) in recorded history. at some point a bear market of at least 20% down will happen again, but it’s important to keep that in perspective. The average bear market has lasted only about 15 months, according to the Schwab Center for Financial Research, and 80% of corrections since 1974 have not led to a bear market.
It remains to be seen if the recent market volatility has reached its crescendo or if the turbulence could continue. Either way, it’s important to remember that market pullbacks are not uncommon and occur in most years. These market corrections can be healthy for resetting stock valuations and investor expectations within a longer-term market advance. we know that markets can be volatile in the short term. but we also understand that having a long-term strategic asset allocation plan and sticking to that plan during periods of market volatility can help keep you on track to meet your financial goals.
Schwab Smart Portfolios are designed to provide broad diversification across up to 20 asset classes in any portfolio, including defensive asset classes such as cash and gold, which can help you weather these inevitable periods of volatility. this broad diversification coupled with an automated rebalancing process can help provide the discipline to remain calm during periods of short-term volatility while staying focused on longer-term goals.
david koenig cfa®, frm®, schwab vice president and chief investment strategist intelligent portfolios