Correction About Corrections

Correction About Corrections

I know some of you are nervous about the current sell-off we have had in the past month or so, and I get it.  It is nerve-wrecking to log in one day, see your accounts and feel good about them, and the next see them precipitously go down.  I don’t enjoy seeing it in my portfolio or my clients’ portfolios as much as the next guy or gal.  That said, I think in times like these it is helpful to level set and clear the air.

There are many misconceptions when it comes to “corrections,” and the two biggest ones I always hear are “this time is different” and “we haven’t had a correction like this in years.”  Well, let’s take some time and set the record straight.  As of writing this, the current correction has the S&P down approximately 5.5% from its current high.  I know it is not fun, but when I hear someone say we haven’t seen this in years, my mind is dumbfounded.  Then I instantly remember we all suffer from recency bias, and it is a very hard thing to break.

Let me start by setting the record straight, and I think graphs and charts are always a great equalizer.  Here is one from Charlie Bilello at Creative Planning. 

This chart shows every correction since 09, and I’ll save you the laborious task of counting, as there have been 30 of them in 15/16 years.  The most recent one was July-August last year, when the market was down 9.7%.  May I remind you that the S&P 500 ended up 25% for the year. 

Yeah, but Andrew, that was an aberration!  What if I told you that the previous correction was 4 months earlier, of -5.9% in March of that same year?  Still think it is an aberration to have a correction in a given year.  Not only have we had 30 corrections since 09, the average number of days has been 26 for each correction, with an average of -7.6%.

If you really want me to browbeat you with mind-numbing stats, how about this one?  Over that 15/16 year time period the S&P 500 has had exactly 3 negative years (’22 of -19.44%, ’18 of -6.24%, & ’15 of -.73%)!  Oh, I forgot to mention that in ’09 the S&P 500 was at 930 points and today it is at 6147!

Being a financial coach and guide, you can see that when we hear it has been a while, we have to flex our historical acumen and remind people that those who don’t know history are doomed to repeat it. 

Now let me address the other big concern I hear, which is that this time is different.  There are certainly some half-truths to that comment that this time is different, but isn’t that always the case?  If you reference the graph above, slowdown concerns are not a “different” concern, and even in ’19, we had concerns about tariffs.  Thus, I could easily argue this time is not different.  That said, if I were to debate, I would say, of course, it is different.  We believe every correction and every concern is unique, as there are thousands of micro data that goes into the market movements. 

I guess in a weird way, I’m saying duh, of course it is different, much like a snowflake.  No two corrections will ever be identical, and honestly, how could that ever be the case?  This is the only time Donald Trump will have a second term while Russia is invading Ukraine, war in the Middle East, inflation is where it is at, we’ve come off a 25% year in the market, and the list goes on.  But much like a snowflake being different, we know exactly what the snowflake will yield, along with all its other snowflakes.  Similarly, although we are living through our 30th correction in half as many years, we also know exactly what the outcome will be and the playbook.  This too shall pass, until the next one, and as long as you stay true to your investment philosophy while not getting sucked into the fearmongering news trap, you’ll come out the other side like you always do.

Hopefully, you found this information reassuring and dispelling corrections in general.  They are a natural course of investing in the markets, and instead of fearing them, we should simply embrace them for what they are: a temporary setback.  That is my outlook and the one I try to espouse to anyone who will listen.  So hopefully at least one person reading this will listen and thank me for it in the future. 

As always, stay wealthy, healthy, and happy!