Past trends help us grapple with alarming pullbacks following all-time highs
The S&P 500 Index (SPX) fell into “correction territory” as coronavirus news unfolded last week. Correction territory is defined as a 10% pullback. Not only did the index pull back double-digits from an all-time high, it did so at alarming rate. In six trading days, the S&P 500 went from closing at an all-time high, to down more than 10%. This week, I’m looking at how stocks often behave following corrections in hopes of seeing if there’s any difference when the pullback is so sudden.
General 10% Pullbacks From All-Time Highs
Going back to 1950, there have been 21 other occurrences in which the S&P fell 10% from a new all-time high. The table below summarizes the returns after those instances. The second table shows typical returns for comparison.
Surprisingly, it looks like business as usual after the pullbacks. The one, three and six-month returns look like typical returns when it comes to the average return and percent positive. The returns over the next one month do show more volatility than normal, as measured by the standard deviation of returns. Looking over the next full year there’s a bit of underperformance with returns after a signal averaging 4.3% compared to a typical one-year return of almost 9%.
Fastest Correction Ever
What’s unique about the recent correction is the speed at which the S&P 500 went from an all-time high to a 10% loss. The table below lists each individual pullback that happened in 20 trading days or less (20 trading days is about a calendar month). The recent downturn occurred in just six trading days, which was the fastest correction ever from an all-time high.
The table below summarizes the S&P 500 returns after the five quickest pullbacks shown in the table above. You can’t be too confident in the conclusions drawn from just five data points, but the returns have been bullish. Six months after the most abrupt declines, the S&P averaged a 14% return and all five returns were positive. The one and three-month returns were also impressive.
Finally, below is a chart showing the path of the S&P 500 Index for the next year after those five quickest corrections. The bold line averages the results.
