The selloff continued on Tuesday, with the S&P 500 Index down 7.8% in the usually bullish month of April. With three days to go, this could go down as the worst April since a 9.0% drop in 1970.
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, though, that historically midterm years can be rough, down more than 17% on average peak-to-trough. The March 8 closing low, which amounted to a 13% correction, is still the low for the year as of now. The good news is a year off those lows stocks have historically gained more than 32% on average.
One potential worry is in midterm years stocks usually bottom later in the year. “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 LPL Chart of the Day, midterm years see the S&P 500 bottom on August 14 on average, and the median bottom is in early September. But the good news that is important 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, this is still the second best start to a bull market ever. After the fastest bull market to double in history, some type of potential weakness or consolidation shouldn’t be overly surprising.
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%.
Lastly, we knew coming into this year that more volatility was possible, potentially early in the year as that’s been the playbook during midterm years. Looking at the entire four-year Presidential cycle shows that this quarter is actually the worst out of 16. Last quarter (year 2, quarter 1) and next quarter (year 2, quarter 3) are pretty weak as well. The good news is some stronger quarters are right around the corner.
The weakness we’ve seen so far this year has been disappoiting and taken many investors by surprise. But after more than a 100% rally off the March 2020 lows, some type of usual midterm year frustration was likely.
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