While we ended 2013 with the S&P 500 up more than 30%, as of February 3rd, 2014, the S&P 500 has dropped about 7% from its mid-January all-time high. As avid market watchers would say, we are somewhere in between a “dip” and a “correction”. Since October 3, 2011, the S&P 500 has rallied 68.15% over 835 calendar days without a correction of at least 10%. Source: Bloomberg.
Investors always want to know what’s next. Is a correction coming? Are we overdue? We believe that forecasting is a fool’s errand, both because the short-term market is unknowable and because short-term performance has little impact on long-term investment success. That being said, it might be instructive to look at what history shows.
This table shows that 2013 was the 18th time in S&P 500 history that the index enjoyed a price return of over 25%. On average, the return in the following year was a positive 6%, with the only doozy of a down year occurring during the Great Depression in 1937. There were few years with the market correcting little. Sources: Strategas Partners and Schwab. This suggests there is no historical basis for assuming a correction always follows a banner year.
Eventually, of course, a correction of some kind is inevitable, but predicting when and how big that drop will be is very difficult. Since the end of World War II in 1945, there have been 27 corrections of 10% or more and 12 corrections of 20% or more. Source: Dow Jones. This equates, on average, to one correction roughly every 20 months. Of course, that average can be a bit deceiving as they do not occur on schedule. One-fourth of those corrections occurred during the 1970’s and one-fifth happened in the last decade from 2000-2010. Source: Merrill Lynch. Clearly, the markets do not follow a 20-month correction cycle.
To summarize, history shows that corrections are part of a normal market cycle and we cannot predict the timing of any correction. A big up year does not necessarily mean a correction in the following year. We don’t know when a correction will occur, but we do know that markets have progressed upward throughout history despite occasional corrections. We also know that when corrections do occur, they often prove to be great buying opportunities in the fullness of time.
If a 10% to 20% correction is unbearable to you mentally or financially, that likely means your portfolio is not in line with your tolerance for risk. Contact a GV Financial Advisor to help you determine whether your portfolio is appropriate for your risk tolerance and your life goals, income and growth needs.