Let's Talk About The Market Sell-Off

The market selloff has continued with the S&P 500 Index down nearly 13% as of Friday.

The usual suspects of a slowing economy, a hawkish Federal Reserve Bank (Fed), supply chain worries, war in Europe, and now another China shutdown have all combined to make this one of the worst starts to a year ever for both stocks and bonds.

It is important to remember that midterm years have historically been rough, down more than 17% on average peak-to-trough. The good news is a year off those lows, stocks have historically gained more than 32% on average.
Stocks usually bottom later in the year during midterm years. “Could stocks bottom for the year in March or April? Sure, but history would say midterm year lows tend to be later in the year,” explained LPL Financial Chief Market Strategist Ryan Detrick. “You’d have to chalk this up as one clear potential worry out there still.”

As shown in the chart below, midterm years see the S&P 500 bottom on August 14 on average, and the median bottom is in early September. The good news and very important point for investors to remember is big gains a year off those lows have been quite common.

Something else to remember is just how strong the bull market was off the March 2020 lows. As you can see below, 2020 was the second best start to a bull market ever. Some type of potential weakness or consolidation shouldn’t be overly surprising after the fastest bull market in history.

Many investors forget that double-digit declines during a year are actually normal. After only one 5% pullback all of last year, markets have provided an unfriendly reminder in 2022. In fact, since 1980, the average correction each year is 14.0%, putting this year’s 13.0% correction in perspective. Taking this a step further, 21 times since 1980 the S&P 500 has been down double digits at one point from its peak, with an impressive 12 of those years managing to come back and finish the year positive. In fact, the average yearly gain those 12 years was a very solid 17.0%.

We acknowledge that market volatility can be uncomfortable. It is important to remember that their are two directions of the market. "It has been said that the two directions of the market are not up and way up. That is to say if markets go up and down that is part of their function. Sometimes it is an escalator up and elevator down experience. It also speaks to the importance of having a diversified portfolio and managing risk appropriately," summarizes G. Ward Keever, CLU, ChFC, RHU, AEP, CFS, AIF, CKA, President & CEO of Covenant Wealth Strategies.

Our Covenant Wealth Strategies Investment Team continues to closely monitoring market fundamentals and technicals and are making appropriate tactical shifts in keeping with our strategies, while doing tax loss harvesting as appropriate.

If you have specific questions related to your own investments or financial planning needs, we welcome you to contact us to set-up time to discuss how we can assist you.

This material is for general information only and is not intended to provide specific advice or recommendations for any individual. There is no assurance that the views or strategies discussed are suitable for all investors or will yield positive outcomes. Investing involves risks including possible loss of principal. Any economic forecasts set forth may not develop as predicted and are subject to change.

References to markets, asset classes, and sectors are generally regarding the corresponding market index. Indexes are unmanaged statistical composites and cannot be invested into directly. Index performance is not indicative of the performance of any investment and do not reflect fees, expenses, or sales charges. All performance referenced is historical and is no guarantee of future results.

Any company names noted herein are for educational purposes only and not an indication of trading intent or a solicitation of their products or services. LPL Financial doesn’t provide research on individual equities. All information is believed to be from reliable sources; however, LPL Financial makes no representation as to its completeness or accuracy.

All index data from FactSet and MarketWatch.

This Research material was prepared by LPL Financial, LLC.