A note from CFS1 advisors Tony Fox and Joey Tsai
On February 27, 2020, barely two months after returning an impressive 31.49% gain for 2019, the S&P 500 Index fell into correction territory—that is, when a stock-market index declines by 10% or more from its most-recent high. The drop was triggered by a sharp rise in fears about the China-born coronavirus and the impact of its rapid spread on the global economy.
It’s understandable that investors may be alarmed by such a dramatic market plunge, but it’s important to recognize three important facts about stock-market corrections:
- They are quite common.
- They aren’t typically tied to an economic crisis.
- They are actually necessary for the health of the overall market.
» Corrections are common
Exhibit 1 provides some perspective: On average, U.S. stock-market corrections occur about once every year.
Before this month, the most recent correction in the S&P 500 Index took place in September 2018 as intensifying trade tensions and rising interest rates took a toll on stock prices. Prior to that, in February of the same year, a surprise jump in average hourly earnings and an increasingly hawkish Federal Reserve drove the U.S. equity market sharply below recent its high.
» Corrections don’t usually equal crisis
A further look back provides additional perspective: As seen in Exhibit 2, the average recovery period for declines of 10% or more is about 12 months. This may sound like a long time, but one year is just a temporary setback for a long-term investment strategy.
» Corrections don’t last forever
When markets correct, we think it’s best to just wait. And, as history shows, there’s a solid chance of recovering correction-related losses relatively quickly. No one likes to see the value of their investments decrease, but we know that ups and downs are a normal part of the investment cycle.
1) Non-deposit investment products and services are offered through CUSO Financial Services, L.P. (“CFS”), a registered broker-dealer (Member FINRA/SIPC) and SEC Registered Investment Advisor. Products offered through CFS: are not NCUA/NCUSIF or otherwise federally insured, are not guarantees or obligations of the credit union, and may involve investment risk including possible loss of principal. Investment Representatives are registered through CFS. Clackamas Federal Credit Union has contracted with CFS to make non-deposit investment products and services available to credit union members.