Let’s Talk About Pullbacks And Corrections

July 10th, 2019 by Legacy Wealth Planning

Let’s get one thing straight: Market pullbacks, corrections, and bear markets happen.

Last year was a perfect example of this: The S&P 500 Index endured five separate 5% pullbacks throughout the year, and a nearly 20% bear market correction from the September peak until December 24. (We consider a pullback 5% off the recent highs, a correction 10% off the recent highs, and a bear market is 20% off the recent highs.)

Looking back, 2017 was one of those rare years when there was extremely little market volatility, but we sure made up for it late in 2018. So far, 2019 has been quite calm—all things considered. Since 1950, an average of three separate 5% pullbacks have occurred each year. We’ve seen one of these so far this year.

“Although it might not seem like it, 2019 hasn’t had much downside volatility so far,” explained LPL Senior Market Strategist Ryan Detrick. “We had the 7% correction in May, but the odds are quite high that a larger pullback or correction could be in the cards in the second half of 2019.”

If history is any guide, a pullback or 10% correction at this point could be a valuable opportunity for suitable investors.

When the economy wasn’t in a recession or massive bubble, S&P 500 returns a year or two after a correction have been quite impressive. As our LPL Chart of the Day shows, Stocks Tend to Outperform after Corrections, going back to 1980, the S&P 500 has posted strong returns after bottoming in a correction. In fact, the only times we saw negative S&P 500 returns after a correction were after the tech bubble in 2000, the recession of 2001–2002, and the financial crisis. Given we don’t see an impending recession over the next 12–18 months, we would use any market correction in 2019 as an opportunity for suitable investors to rebalance portfolios, with a tilt toward value, cyclicals, and emerging markets in suitable strategies.


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.

Rebalancing a portfolio may cause investors to incur tax liabilities and/or transaction costs and does not assure a profit or protect against a loss.

Investing in foreign and emerging markets securities involves special additional risks. These risks include, but are not limited to, currency risk, geopolitical risk, and risk associated with varying accounting standards. Investing in emerging markets may accentuate these risks.

Because of their narrow focus, sector investing will be subject to greater volatility than investing more broadly across many sectors and companies.

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.

The modern design of the S&P 500 stock index was first launched in 1957. Performance back to 1950 incorporates the performance of predecessor index, the S&P 90.

This Research material was prepared by LPL Financial, LLC.

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