With recent action, the S&P 500 has fallen into “correction” territory. What does this mean for your portfolio?
With recent action, the S&P 500 has fallen into “correction” territory, its first of its kind since October of 2023. Of course, as with any significant exhale, clients are undoubtedly calling in and questioning their overall performance and market positioning. Part of protecting our client’s assets is protecting them from themselves, the emotion and fear of watching their portfolio bleed red and selling at the wrong time. All in all, today’s feature will look to arm you and your clients with the knowledge of what a correction really is, and what it means within your portfolio and different asset classes going forwards.
To start, it is important to understand that a correction is “normal” in all definitions of the word. There have been 103 technical corrections since 1928, shaking out to about one 10% pullback per year. That certainly isn’t to say that this makes them feel any better while they are happening, but is useful to understand the historical perspective. The 22 day fall from all-time highs established in February marks the quickest correction since the Covid-19 decline in March of 2020, and the longest instance without a 10% pullback since the start of 2022 market exhale (503 days.) This is a longer drought than usual, with historical averages between corrections clocking in just under 350 days. The chart below breaks this down in a bit more detail- showing the count of corrections per decade paired with that decade’s respective correction frequency. It is worth noting that the 2020’s six corrections sits on par with other full decades (despite only being halfway done with this one…), giving some credence to the idea that pullbacks are indeed occurring a bit more frequently than other times in history. All that said however, this isn’t a particularly concerning development as the overall length between exhales remains largely in line with historical averages.
But knowing historical averages is only half the battle. Of course, the next step in any analysis, particularly those that deal with significant declines, is to understand what may be in store for various asset classes going forwards. The charts below go into detail here, highlighting the average, maximum and minimum for various asset classes across different timeframes post 1970. It is important to note that that these returns are following SPX corrections, not corrections for each respective representative (We did not look at, for example, RUT correction dates and gather RUT returns from those dates, rather just focused on SPX data at starting points.) That disclaimer aside, the interesting aspect we want to highlight here is that most times, things are quite positive post-correction. One year SPX returns in the 46 post-1970 corrections average 11.36%, just above historical long-term averages. Similar metrics are found across the different asset classes. But of course, it isn’t solely sunshine and roses following 10% pullbacks. In order for there to be a 30% decline, there first logically has to be a 10% exhale. While the S&P 500 is positive one year out roughly 73% of the time following a correction, the times where it wasn’t saw the index fall over 17% on average. The elephant in the room is the November 2007 correction which preceded the near 40% loss around the 2008 GFC. Obviously, the spread here is quite large.
From a purely statistical standpoint, 2025’s 10% decline is probably just that. There is, of course, the chance that it is something much larger. From geopolitical tensions, growth concerns, and much more, there are plenty of headlines bombarding clients every day with reasons to think exactly that. There is cause here to get defensive- to pause allocation to risky assets until bulls can prove that this truly is nothing larger, but making a complete allocation shift to cut domestic equities out here may be premature. Regardless of what is in store as we enter the second quarter of the year, keep an eye on the charts for updates as the technical picture helps guide us forwards.
