2015 Stock Market Correction
It has been a brutal month for the stock market. You can draw a parallel to the old saying “the bigger they are, the harder they fall.” Although the stock market has experienced volatility over the past few years, there has not been a real correction since 2011, so it’s falling hard.
Since 1945, there have been 27 market corrections (a market pullback of 10% or more). That equates to one approximately every 20 months. The average decline during these corrections was -13.30%. Additionally, the average duration of these occurrences has been 71 days.
|Drop (peak to trough)||Dow Jones -16.24% / S&P 500 -14.75%||-13.30%|
|Duration||102 days so far||71 Days|
We believe this correction is technical not fundamental, meaning that structurally the U.S. is in decent shape. Housing has been improving, auto sales have posted strong numbers lately, unemployment has steadily declined, and GDP has rebounded. On top of that, valuations on equities around the world are far from expensive. The price to earnings ratio (PE) ratio on the S&P 500 based on 2016 earning’s estimates is 15, which is historically about average. Overseas, valuations look even more attractive. For example, the equity market in Germany is trading at about 12X forward earnings.
Here’s the good news: Based on the note from Brian Belski of BMO Capital Markets, returns after corrections since 1990 have been very strong, averaging 19.9% in the S&P 500 over the following 6 months and 31.4% over the next year.
History shows that throwing in the towel during periods of volatility is the biggest mistake an investor can make. Sticking with an asset allocation strategy works over the long run even if that means sustaining losses in the short term. It is worth noting that our portfolio strategies are developed with a level of downside protection in place. In fact we have been using this pullback as a buying opportunity to rebalance client portfolios.
Richard Siegel, CFP®
Managing Partner, ARQ Wealth Advisors, LLC