From the Matrix Team | Thoughts on the Current Market Correction

Last week marked the fifth consecutive week that the stock market [i] declined.  This is the first period since the March 2020 lows that the market is undergoing a significant correction.  As with most every sell-off, the news flow seems to go from bad to worse, the problems appear to be insurmountable, and it feels like, best case, an eventual recovery is far off and highly uncertain.

To put the current decline and its likely aftermath in perspective, we have updated our “Corrections, Recoveries and Long-Term Returns” white paper that we published last year.  The findings should give equity investors great comfort.

From the period 1993 to 2021 (29 years), stocks grew about +10.6 percent per year.  So, $1,000 invested on January 1, 1993, grew to $17,680 at the end of the study period.  Importantly over that period, there were 35 corrections of 5 percent or more, with 13 of those that were 10 percent or greater.  So even though there was a great deal of volatility and an annual average of about 1.2 pullbacks of at least 5 percent, stocks had healthy growth over time [ii].

Generally, market corrections were swift; the average pullback occurs in just 2.8 months.  What is equally surprising, and never feels like is possible or will happen, is that the average recoveries are also swift, with stocks fully recovered to their past highs in an average of 4.7 months.  It’s easy to be overwhelmed by the negative news and the market’s reaction.  But this is a normal part of investing, and recoveries often occur when they are least expected and will frequently play out faster than seems possible.

In its March 7 edition, Barron’s looked at the current sell-off in the context of other market declines caused by war and other crises.  They came to a similar conclusion: stocks (as measured by the Dow Jones Industrial Average) fell by “an average of 7 percent in the immediate aftermath of a crisis … after 18 weeks it was up an average of 9.6 percent.”

The Russia/Ukraine war is heartbreaking in terms of the human devastation and is hugely worrisome from a geopolitical perspective, but we are confident the US economy and stock market will get through this crisis.

While there are lots of big worries, there are also positives.  The US economy is strong, businesses are doing well, the consumer is in very good shape, life is getting back toward normal as Covid becomes more manageable, and interest rates are still low.

So taken all together, we think in all likelihood the majority of the stock market pullback has run its course.  We also believe that the current decline will be followed by an equally robust rebound, and still believe that the most likely course is for a reasonable year of positive stock market returns.

Attached is our recent study on stock market corrections and recoveries that is the basis for some of the thoughts discussed above.  Additionally, here is a link to a March 11, 2022 interview that David Katz gave on Bloomberg Radio that addresses the same topic. David’s interview begins at 10:35 and goes for about 3 minutes.

We are around and available if you have any questions on the attached materials or if you want to discuss your portfolio or our outlook in the upcoming weeks.


The Matrix investment team

[i] The “market” or “stocks” refers to the S&P 500 Index as a useful proxy for US stocks overall.

[ii] Investing involves risk, including the potential loss of principal.  No investment can guarantee a profit or protect against loss in periods of declining value.  Opinions and projections are as of the date of their first inclusion herein and are subject to change without notice to the reader.  As with any analysis of economic and market data, it is important to remember that past performance is no guarantee of future results.

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