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.
Thanks to our friends at Ned Davis Research (NDR) for our chart data.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual security. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. The economic forecasts set forth in this material may not develop as predicted.
All indexes are unmanaged and cannot be invested into directly. Unmanaged index returns do not reflect fees, expenses, or sales charges. Index performance is not indicative of the performance of any investment. All performance referenced is historical and is no guarantee of future results.
Investing involves risks including possible loss of principal. No investment strategy or risk management technique can guarantee return or eliminate risk in all market environments.
This research material has been prepared by LPL Financial LLC.
To the extent you are receiving investment advice from a separately registered independent investment advisor, please note that LPL Financial LLC is not an affiliate of and makes no representation with respect to such entity.
The investment products sold through LPL Financial are not insured deposits and are not FDIC/NCUA insured. These products are not Bank/Credit Union obligations and are not endorsed, recommended or guaranteed by any Bank/Credit Union or any government agency. The value of the investment may fluctuate, the return on the investment is not guaranteed, and loss of principal is possible.
For Public Use | Tracking # 1-853351 (Exp. 05/20)