The stock market is witnessing a correction, or a decline in the major indexes of 5-10%. As of this morning, the S&P 500 Index had declined 8% from its mid-July highs. Notably, the “Magnificent 7” group of tech-dominated stocks have seen a 15% decline.
It is worth emphasizing the last 75 years of intra-year declines. The U.S. stock market averages a 5% drop more than twice a year and a 10%+ correction once a year. The chart below shows the calendar-year history of intra-year stock market declines. It’s important to note that annual and longer-term returns for U.S. stocks tend to favor the disciplined investor.
S&P 500 Calendar-Year Return vs. Largest Intra-Year Decline
The Macro Environment
- Recession probability has increased, given the latest unemployment rate increase and slower manufacturing activity, ISM Index data.
- Second quarter profit reports have been healthy with corporate profits up 10%.
- Inflation rates have witnessed considerable moderation, which can lead to Federal Reserve easing. The recent drop in Treasury yields, in part, is reducing the cost of capital for businesses and households.
- More importantly in periods of macro uncertainty is the durability of the overall portfolio. Diversification, quality and time all play a role in preventing temporary market risk from translating to permanent portfolio impact.
For investors who question if today is a day to be selling, the following table helps answer that question. A review of market returns just prior to significant market declines reveals that stock returns have well exceeded cash (Treasury bill) returns, even if one was a buyer right before the market corrections.
Returns Post-Market Decline
| 5-Year Cumulative Returns | Cumulative Return | |||
|---|---|---|---|---|
| Purchased | From 10/16/1987 | From 9/7/2001 | From 9/12/2008 | 2/19/20 as of 7/31/24 |
| S&P 500 Index | +72.8% | +30.0% | +50.3% | +74.9% |
| ICE BofA U.S. 3-Month T-Bill Index | +41.5% | +12.0% | +1.0% | +10.4% |
Source: Bloomberg
In a reasonable five-year timeframe, comparing stock to cash returns is powerful. In today’s market environment, a steady focus on long-term objectives, and the role that time plays in resolving uncertainties, remains essential.