For the last 30 years, the annualized return of the S&P 500 index has been 10.5%.1 However, the S&P 500 rarely goes up in a linear fashion and often achieves this level of return despite some periods of market volatility.
Corrections in the stock market, generally defined as a market decline of 10% or more, are a normal part of stock investing and occurred in over half of the last 45 years.2 The chart below shows the annual performance of the S&P 500 for each year back to 1981 (red bar), but also reflects the largest correction that happened during that year (gray bar). The data clearly shows that corrections happen in both weak and strong years.
In 2024, the S&P 500 was off to a strong start, up over 19% on July 16. Recently, however, the S&P 500 has declined 8% and sold off over 3%3 in a single day (August 5). Despite these declines, the S&P 500 is still not in the official “correction territory” (-10% or greater) and is still up over 10% year to date.
This most recent decline left investors searching for the cause of the selloff. The exact reason and timing of declines are hard to pinpoint but a few of the possible reasons include:
- A weak jobs number (Unemployment rose to 4.3%)
- A concern about Fed policy being behind actual economic conditions
- A volatile Japan market with the Nikkei down over 12% in a single day
While reasons for corrections can be different, pullbacks and corrections are normal and happen frequently in market history. This most recent period has been the outlier, with relatively low volatility and very few days when the market is down by more than 2%. The market went almost a year (356 days) without a daily decline of 2% or more.4 That is the longest streak since 2007.
This is beginning to change as recently there have been two days when the S&P 500 was down by more than 2% (July 24 and August 5). As seen in the chart below, these two days are outliers compared to the narrow range of daily returns of the S&P 500 over the last two years. However, these are more consistent with price changes over the last five years. Further, the recent change in volatility and price changes could be a sign that price dispersion could increase in the back half of 2024.
It is our opinion that volatility will be greater in the remainder of 2024 compared to the relatively benign environment seen since September 2023. Investors’ concerns over economic growth, actions of the Federal Reserve, and an upcoming election could all influence price changes to be more volatile than recent history.
Despite our expectations, we still believe in sticking to your investment plan and staying the course through periods of higher volatility. Pullbacks and corrections, while never enjoyable, are a normal part of the long-term history in the stock market. Trying to transact around every inflection point, especially during times of higher-than-average price changes, is a difficult proposition and is not recommended.
- Source: Factset 8/6/1994 thru 8/6/2024
- Source: Factset 1/1/1981 thru 8/6/2024
- Source: Factset 1/1/2024 thru 8/6/2024
- Bloomberg: S&P 500 Snaps Streak
Posted here on Aug 8, 2024 by Keith Gangl, CFA