As we noted yesterday, the recent bout of volatility has caught many investors off guard. However, we’ve been saying since late March that some type of normal correction could happen, and we’ve taken a more cautious stance.
This was one of the best starts to a year ever for equities, which historically has led to modest returns the next six months, with an above average chance of a large correction.
The S&P 500 Index fell nearly 5% before bouncing back yesterday. Here’s the catch: 5% pullbacks are actually perfectly normal parts of investing. “After a 25% bounce since the lows of December and a near 5% decline, it might feel scary and uncomfortable to investors, but it is important to remember that pullbacks are part of investing,” explained LPL Senior Market Strategist Ryan Detrick. “Trees don’t grow forever, and neither do bull runs. A break is usually needed before the eventual resumption of higher returns.”
For more on why we think a pullback could take place, listen to our latest LPL Market Signals podcast.
As our LPL Chart of the Day shows, there has been an average of more than three separate 5% declines for the S&P 500 per year going back to 1990. Given there hasn’t been a 5% pullback yet this year, we think the odds are quite strong that we see multiple 5% drops the rest of this year as the economic cycle ages and volatility picks up.
5% Corrections Are Normal
Thanks to our friends at Ned Davis Research (NDR) for our chart data.
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