Stocks October 29, 2018

    The S&P 500® Index fell into "correction" territory in the final days of October, closing more than 10% below its last all-time high reached in late September. October's turbulence has brought the second correction in less than a year, with a pullback of more than 10% also having occurred in early 2018.

    Corrections can cause a lot of anxiety. However, it's important to recognize that financial markets have historically seen a significant pullback at some point during most years while still delivering positive returns over the full year. For example, in 2016, the S&P 500 saw a "market correction" of more than 10% in the first few weeks of the year but ended the year with a gain of 12%.

    These market corrections are more common than you might think. The early 2016 pullback, for example, also came less than a year after a previous one in mid-2015. These occasional pullbacks have historically been followed by rebounds, according to the Schwab Center for Financial Research. Since 1974, the S&P 500 has risen an average of more than 8% one month after a market correction bottom and more than 25% one year later. Investing in a diversified portfolio and maintaining the discipline to stick with your longer-term plan through these periods of volatility are among the keys to investment success.

    Stock market corrections are not uncommon

    To illustrate the volatile nature of financial markets, we took a look at intra-year stock market declines over the 20-year period from 1998–2017. As you can see in the chart below, a decline of at least 10% occurred in 12 out of 20 years, or 60% of the time, with an average pullback of 15.6%. And in two additional years, the decline was just short of 10%. Despite these pullbacks, however, stocks rose in most years, with positive returns in all but four years and an average gain of approximately 7.2%.

    Stock market corrections are fairly common

    Having a longer-term plan and sticking to it is key to investment success

    The current bull market reached its 9th anniversary in early 2018, with the S&P 500 having quadrupled in value from its March 2009 low through Oct. 26, 2018—even after its recent pullback. Schwab’s outlook has become more cautious in recent months amid rising interest rates, concerns that economic growth might have peaked, concerns about trade, and other geopolitical uncertainties. However, earnings remain strong and it is too early to declare the end of the bull market. At some point, a bear market of at least a 20% decline will occur, but it’s important to keep them in perspective. The average bear market has lasted only about 17 months, according to the Schwab Center for Financial Research, and 80% of corrections since 1974 have not led to a bear market.

    It remains to be seen whether the recent market volatility has reached its crescendo or whether the turbulence might continue. Either way, it's important to remember that market pullbacks are not uncommon — and occur in most years. These market "corrections" can be healthy in resetting stock valuations and investor expectations within a longer-term market advance. We know that markets can be volatile in the short term. But we also understand that having a long-term strategic asset allocation plan and sticking to that plan through periods of market volatility are among the keys to long-term investment success.

    Schwab Intelligent Portfolios® is designed to provide broad diversification across up to 20 asset classes in any portfolio, including defensive asset classes such as cash and gold that can help you withstand these inevitable periods of volatility. This broad diversification along with an automated rebalancing process can help provide the discipline to remain calm during short-term volatility while staying focused on longer-term objectives.

    David Koenig CFA®, FRM®, Vice President and Chief Investment Strategist for Schwab Intelligent Portfolios®

    Investing involves risks including possible loss of principal.

    Diversification and rebalancing strategies do not ensure a profit and do not protect against losses in declining markets.

    Schwab Intelligent Portfolios is designed to monitor a client’s portfolio on a daily basis and will also automatically rebalance as needed to keep the portfolio consistent with the client’s selected risk profile unless such rebalancing may not be in the best interest of the client. Trading may not take place daily.


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