How Normal Is This Correction?
Submitted by ClearBridge Wealth Management on February 16th, 2018February 13, 2018
The S&P 500 Index officially pulled back into correction territory last week for the first time since early 2016. The widely accepted definition of a correction is a 10% decline from the most recent high. What made this correction so unique is that it was the first time the S&P 500 has ever gone from a new all-time high to a correction in nine days or less. Such a quick pullback can be very unnerving, to say the least, but is often necessary to maintain a healthy market environment.
After one of the most tranquil equity markets in history last year, seeing a pickup in volatility in 2018 shouldn'tt be a surprise. In fact, a continuation of the bull markets amid higher volatility has been one of our main themes for 2018 as expect a return of the business cycle. We looked at all 36 S&P 500 corrections since 1980 but we also think the max intra-year pullback, along with the total return for the S&P 500 for each calendar year starting in 1980, provides a few more helpful takeaways:
- The average max intra-year pullback is 13.7%; compare that to 2017's 2.8%
- Half of all years (19 out of 38) saw at least a 10% correction during the year
- 13 of the 19 years with a correction finished higher on the year
- The average total return for the S&P 500 during a year that had a correction was 7/2%
“The reality is a 10% correction is quite normal. In fact, years that have a correction but don’t fall into a recession tend to bounce back and usually finish green for the year. With our analysis suggesting little chance of a recession over the next 12 months, recent weakness could prove to be a buying opportunity for long-term investors,” according to LPL Senior Market Strategist, Ryan Detrick.
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