A single image can often convey more about financial markets than a lengthy research report. Our new series, OppChart Weekly, comprises compelling charts covering different aspects of world markets—and their implications for investors. Today’s chart focuses on market corrections.
Stocks have retreated in recent weeks as investors fret about negotiations over the $600 billion U.S. fiscal cliff, tensions in the Middle East, and the seemingly never-ending Eurozone crisis. This sort of correction is not uncommon though. Over the past 110 years, markets have pulled back 10%, on average, at some point during every year.1 Such pullbacks have been healthy, setting the stage for markets to retest and surpass prior highs. Recent examples include the 2010 sell-off associated with the European sovereign debt crisis and Japanese earthquake/tsunami, and 2011’s pullback amid the heated debt ceiling debate. As our “OppChart” demonstrates, the average stock market correction not associated with a recession is 21%, though the crash of 1987 weighs the average down a bit.2 A year after markets hit bottom, stocks have recovered more than 23%, and have gained more than 31% after two years, on average.2
Politics may continue to weigh on markets in the near term, but for investors, I believe any weakness will likely represent opportunities to rebuild positions in equities. Why? Assuming we do get through the next month and a half without going over the fiscal cliff, there’s reason to believe the current economic expansion will continue. Stocks are as cheap compared to bonds as they have been in decades,2 monetary policy will likely remain accommodative for years to come, and the herd mentality (which is often wrong) has been generally bearish.
- Source: Standard and Poors, 11/23/12. Past performance does not guarantee future results.
- Source: Bloomberg, 11/16/12. Past performance does not guarantee future results.