Market Corrections: The Medicine No One Wants to Take
Antoine T. Williams, AAMS, CDFA
April 26, 2022
Last week markets fell into correction territory—that is, they declined by 10% or more from its most-recent high. The drop was triggered by a variety of factors, including additional interest rate hikes from the Federal Reserve, persistent inflation, and the conflict between Russia and Ukraine.
While nobody likes to see markets fall, the chart below provides some perspective: on average, U.S. stock market corrections occur about once every year. This recent decline comes just short of the two year anniversary of the previous correction, which took place on February 27, 2020. That downturn was driven by a sharp rise in fears about COVID-19.
While it is understandable that you may be alarmed when the market falls, it is important to recognize three important facts about stock-market corrections: they are quite common; they aren’t typically tied to an economic crisis; and they are actually necessary for the health of the overall market.
A more detailed look back provides additional perspective. As seen in the chart below, the average recovery period for declines of less than 30% is less than six months. That’s just a temporary setback for a long-term investment strategy, and about half of all corrections since 1966 have resolved themselves in less than five months.
While stock markets have had a good run since early 2020 amid mostly calm conditions, we’re not surprised by recent volatility. Although no one likes to see the value of their investments decrease, we know that markets don’t climb straight up forever.
We don’t equate higher volatility with a high likelihood that we’re heading toward a bear market or a recession in the near future. Ups and downs are a normal part of the investment cycle. If the current decline is making you nervous, please reach out to Tina and I, we are here and ready to talk whenever you need us.