During periods of low volatility such as 2021, it is easy to forget that corrections are frequent and it is not uncommon for the market to correct -10% during any given year. It has been a challenging market year to date in 2022, and we may see choppiness as the market digests slowing growth, reduced fiscal policy and upcoming tightening of monetary policy. While we don’t anticipate a recession, we should keep things in perspective. The S&P has provided annualized returns of 17% for the past 3 years which is above long term averages. Investors should properly set expectations for strategic portfolios and maintain a longer term focus. As we discuss below, history has shown that rebounds from market corrections are often quite robust, and it is the patient and long term investors who are rewarded.

THROUGH 2/23/22

In a review of previous market shocks, we see that the market has largely shrugged off the geopolitical events. Geopolitical events are unpredictable and usually have limited effects over time. Based on the returns shown on this table, the average S&P 500 return 6 months and 12 months after a market shock has been 7.1% and 10.8%, respectively.

Sentiment metrics reveal the percentage of investors who have a bullish or bearish view of the stock market. Over the past several weeks, bearish sentiment has moved sharply higher. Below we highlight that the only periods of time that bulls have been below 20% and bears over 40%. Extremes in investor sentiment can often indicate higher-probability opportunities. As shown in this table, forward returns are favorable when investors are so bearish.

Market corrections are relatively common. This truth is revealed in these facts:

» Over the past 50 years, there have been 19 market corrections and 8 bear markets. Bear markets are defined by sell-offs where the peak-to-trough decline exceeds 20%.

» While the average intra-year decline is roughly -14% since 1980, 76% of the time the S&P 500 has ended up with a positive return for the year.

» The market has suffered pullbacks of 10% or more in 21 of the last 41 years. The full-year return was positive in 31 of those 41 years- suggesting staying invested has paid off.

For the past several quarters, we have highlighted the upcoming midterm election year in 2022. These years often exhibit greater market volatility. The average downturn in a midterm election year is -17%, but interestingly, the market rebound from the trough averages over 32%.

In conclusion, it is important for long-term investors to maintain commitment to their strategy. Market volatility is common, and these bouts of volatility should not derail investors from their longer-term plan. While it is important to have a lifelong financial plan, it is more important to maintain discipline and restrain from allowing emotion to drive investment decisions when the market becomes challenging. Market volatility creates opportunity, and our team will seek to optimize those opportunities based on our long-term market objectives. 

The views expressed herein are exclusively those of Meeder Investment Management, Inc., are not offered as investment advice, and should not be construed as a recommendation regarding the suitability of any investment product or strategy for an individual’s particular needs. Investment in securities entails risk, including loss of principal. Asset allocation and diversification do not assure a profit or protect against loss. There can be no assurance that any investment strategy will achieve its objectives, generate positive returns, or avoid losses.

Commentary offered for informational and educational purposes only. Opinions and forecasts regarding markets, securities, products, portfolios, or holdings are given as of the date provided and are subject to change at any time. No offer to sell, solicitation, or recommendation of any security or investment product is intended. Certain information and data has been supplied by unaffiliated third parties as indicated. Although Meeder believes the information is reliable, it cannot warrant the accuracy, timeliness or suitability of the information or materials offered by third parties.

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