Stocks have gotten off to a very volatile start in 2022, with inflation fears and the potential for Federal Reserve rate hikes coming. Most recently, the geopolitical worries over Russia and Ukraine are only adding to the uncertainty, but there is some positive news out there.
Starting with Russia and Ukraine, the truth is the U.S. economy and the overall stock market likely won’t be impacted much by the recent conflict. In fact, stocks took most previous major geopolitical events in stride. Looking at more than 20 geopolitical events such as the attack on Pearl Harbor and 9/11, the S&P 500 Index fell only about 5% on average.
When the market drops, some investors lose perspective that downtrends and uptrends are part of the investing cycle. When stock prices break lower, it's a good time to review common terms that are used to describe the market's downward momentum.
A pullback represents the mildest form of a selloff in the markets. You might hear an investor or trader refer to a dip of 5-10% after a peak as a "pullback."
The next degree in severity is a "correction." If a market or markets retreat 10% to 20% after a peak, you’re in correction territory. At this point, you’re likely on guard for the next tier.
In a bear market, the decline is 20% or more since the last peak.
All of this is normal.
Pullbacks, corrections, and bear markets are parts of the investing cycle.
When stock prices are trending lower, some investors can second-guess their risk tolerance. But periods of market volatility can be the worst times to consider portfolio decisions. Pullbacks and corrections are relatively common and represent something that any investor may see from time to time in their financial life, often several times over the course of a decade. Bear markets are much rarer. A retirement strategy formed with a financial professional has market volatility factored in.
Here are some important numbers that should help calm investor anxiety.
- The S&P 500 Index officially moved into a correction of 10% last week for the first time since March 2020. Since 1950, there has been an average of one 10% correction per year, so some volatility was likely simply due.
- On average, the index sees a peak-to-trough correction of 14% in any given year, and even in up years there is an 11% correction on average.
- After a correction of 10-15%, the index has seen an average one-year gain off the lows of 22% and has gained in 12 of the 13 one-year periods.
- Midterm election years tend to be among the most volatile out of the four-year presidential cycle. In fact, the average midterm year sees a peak-to-trough pullback of 17.1%, but stocks are up more than 30% off the lows on average a year later.
The good news is corporate America continues to see strong earnings. S&P 500 earnings per share in the fourth quarter are tracking to a 31% year-over-year increase (FactSet), roughly 10 percentage points above the consensus estimate when earnings season began. The top-line growth was extremely strong as well, with revenue growth up close to 15%. Lastly, profit margins saw very little compression, as companies with pricing power have been able to pass along higher costs and largely preserve those high margins, which are well above pre-pandemic levels.
The concerns and uncertainties are real, and the road ahead could be filled with more bumps and bruises. However, with U.S. consumers and businesses in solid shape, we think the U.S. economy could grow as much as 4% this year, much better than the pace of the last recovery.
In the words of Thomas Fuller, "darkest hour is just before the dawn" and long-term investors should keep this in mind as better times are likely coming in 2022. Please contact your financial professional with any questions.
This material is for general information only and is not intended to provide specific advice or recommendations for any individual. There is no assurance that the views or strategies discussed are suitable for all investors or will yield positive outcomes. Investing involves risks including possible loss of principal. Any economic forecasts set forth may not develop as predicted and are subject to change. | References to markets, asset classes, and sectors are generally regarding the corresponding market index. Indexes are unmanaged statistical composites and cannot be invested into directly. Index performance is not indicative of the performance of any investment and do not reflect fees, expenses, or sales charges. All performance referenced is historical and is no guarantee of future results. | All index data from FactSet. | All information is believed to be from reliable sources; however, LPL Financial makes no representation as to its completeness or accuracy.
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