Our Perspective on April’s Return to Rocky Markets

War and atrocity. Food and energy price spikes. Widening Chinese lockdowns and supply chain disruption. Big swings in both stock and bond markets. Thus far, 2022—which features this bull market’s first correction (typically a short, sharp, sentiment-driven -10% to -20% pullback)—has been difficult for many investors. After March 8’s low, stocks rose to close the month, only to see renewed volatility in April send markets close to retesting that mark on Tuesday. That seemingly has fear and frustration spreading among investors. But, while such volatile times like this can be hard, we think they aren’t atypical during corrections. They call for calm—and perspective. Corrections are never easy, but they are a normal part of bull markets. Patience is likely to be rewarded, in our view.

Corrections are chiefly sentiment swings, which often start with some plausible seeming negative story. In this case, it seems inflation, war and more recently China’s latest lockdowns underpin the move, with tragic news out of Ukraine stirring investors’ emotions alongside volatility. Being sentiment-driven gives corrections one of their toughest features: They are impossible to predict—and time. We aren’t aware of anyone with a proven history of circumventing sentiment-driven negativity and corrections. Such shifts happen suddenly. There won’t be any warning one is about to start—and no all-clear signal when it is over. The beginning and end are apparent in hindsight only.

But there is a silver lining: Recoveries are usually about as fast as the drop, with stocks normally continuing to churn higher thereafter. Exhibit 1 shows all historical S&P 500 corrections since 1928. If the current correction resolves as others have—and we see little reason to think this time is different—the recovery to new highs and beyond could come much sooner than many seem to anticipate today.

Exhibit 1: Historical S&P 500 Corrections

Source: Global Financial Data, Inc., as of 4/5/2022. S&P 500 Index price returns during and after corrections, 1/3/1928 – 12/31/2021.

Those recoveries are rarely straight lines. There is very often volatility after the low, or even W-shaped corrections. Take 1998’s W-shaped correction. (Exhibit 2) From its July peak to August trough, the -19% drop was swift. But it wasn’t a smooth recovery. An initial jump in September faded, with stocks retesting the lows by early October. To many, that may have felt like a gut punch—discouraging. But three months after August’s low, stocks were back to new highs, even with the retest. Full-year returns ended up being great after a strong, late rally wiped away bad memories from the correction—if you held on. Corrections will try your patience, but given their unpredictability, we think that patience is your best tool today.

Exhibit 2: 1998’s Correction Wiped Out Year-to-Date Gains, but Stocks Still Finished (a Lot) Higher

Source: FactSet, as of 4/26/2022. S&P 500 price index, 12/31/1997 – 12/31/1998.

Bear markets start one of two ways, and we don’t think either cause is present currently. We call them the “wall” and the “wallop.” The wall refers to the proverbial wall of worry bull markets climb. As Sir John Templeton described famously: “Bull markets are born on pessimism, grow on skepticism, mature on optimism and die on euphoria.” In our view, it appears pretty clear we are far from euphoria. A wallop is when a multitrillion-dollar negative—like worldwide pandemic lockdowns—wipes out global economic growth unexpectedly. Widely watched fears circulating in the news may be grounded in reality, but they don’t qualify as wallops. They lack the scale—although we are monitoring them in case they snowball—and enough surprise power to pack a wallop.

In our view, the speed of the drop, widely publicized nature of the associated news stories, sentiment impact and lack of wallop scale strongly suggest the negativity we have seen in early 2022 is a correction, not a bear market. It is hard, and we hate to sound repetitive, but corrections call for calm—not action. Enduring sometimes-rocky roads isn’t fun, but if you need equity-like returns to finance your long-term goals and objectives, there is no avoiding them.