Putting Pullbacks in Perspective

Market pullbacks can be unnerving. That is why investors should make a plan with their financial advisors that addresses pullbacks and is informed by historical perspective, not emotion.

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Pullbacks & Bouncebacks

We can gain important perspective on market pullbacks by considering post-World War II declines in the S&P 500® Index. The majority of declines fall within the 5-10 percent range with an average recovery time of approximately one month, while declines between 10-20 percent have an average recovery period of approximately four months. Pullbacks within these ranges are not uncommon, occurring frequently during the normal market cycle. While they can be emotionally unnerving, they will not generally undermine a well-diversified portfolio and are not necessarily signals for panic. Even more severe pullbacks of 20-40 percent registered an average recovery period of only 14 months.


The Deeper the Stock Market Decline, the Longer the Recovery1
Declines in the S&P 500® (Since 12.31.1945)

Decline % Number of Declines Average Decline % Average Length of Decline in Months Average Time to Recover in Months
5-10 84 (7) 1 1
10-20 29 (14) 4 4
20-40 9 (28) 11 14
40+ 3 (51) 23 58

In contrast, pullbacks of 40 percent or more, while occurring much less frequently, post an average recovery time of 58 months and can potentially compromise an investor’s financial plan. Pullbacks above 20 percent (including all pullbacks above 40 percent), which have registered the longest recovery periods, have been associated with economic recessions. When evaluating a market pullback, the probability of a recession is a key insight to consider when determining whether or not to reduce equity exposure.

While recessions are readily identifiable in hindsight, prospectively they can be difficult to spot. This makes access to reliable market analysis all the more important when determining the probability of a recession.

While recessions are readily identifiable in hindsight, prospectively they can be difficult to spot. This makes access to reliable market analysis all the more important when determining the probability of a recession.

Where Are We Now?

(Guggenheim Investments provides its view of the current market environment - as of 11.2020)

Reopening measures and extraordinary policy easing have supported a strong recovery in economic activity since April. Timely and generous fiscal stimulus boosted disposable personal income, while monetary policy reversed the tightening of financial conditions, fostering a rapid, albeit incomplete, rebound in hiring and spending. As of September, U.S. real GDP had retraced 77 percent of its maximum decline, while employment had retraced 65 percent as of October. Nevertheless, output and employment remain 3.5 percent and 5.6 percent below their February peaks, respectively.

Unfortunately, lax adherence to social distancing guidelines is resulting in a resurgence of new COVID-19 infections in the U.S. and Europe. Total new cases now exceed 500,000 per day globally, indicating widespread transmission around the world. Recent infection trends do not bode well for the winter, when cold weather and holiday gatherings will boost indoor social interactions even as the return of flu season strains healthcare capacity. While we do not expect a return to the stringent lockdowns observed in March and April, a further tightening of social distancing protocols will be required, inflicting pain on the most affected sectors. We expect Congress to pass a new round of fiscal stimulus in the first quarter, but in the meantime personal, small business, and corporate bankruptcies will mount. Fortunately, household balance sheets are generally in good shape, the housing market is strong, and an elevated personal saving rate will give consumers some scope to maintain spending in the interim. The combination of fiscal easing and vaccine distribution should support continued above-trend growth in 2021.

We expect the Federal Reserve (Fed) to do its part to support the recovery, guided by a new and more dovish policy framework. The Fed will no longer aim to cool an overheated labor market in order to avoid an unwanted rise in inflation but will instead strive to overshoot the 2 percent inflation target in order to compensate for past periods of below-target inflation. Given that core inflation lags real GDP by about 18 months, more downside is ahead over the next several quarters, and the experience of the last expansion suggests the Fed will struggle to even reach 2 percent, let alone exceed it. This virtually ensures that the Fed will keep its policy
rate at zero for at least the next several years while maintaining an aggressive pace of Treasury and Agency MBS purchases. With real interest rates deeply negative and our cyclical and tactical asset allocation models aligning in favor of risk asset strength, we see a constructive near-term backdrop for credit markets.

The Coronavirus Pushed the Economy into Recession

The business cycle is one of the most important drivers of investment performance. It is therefore critical for investors to have a well-informed view on the business cycle so portfolio allocations can be adjusted accordingly. After a quick and deep recession, our focus has pivoted to understanding how long and how durable the recovery will be.

Guggenheim has developed several tools to guide this effort. Our Recession Probability Model predicts the probability of a recession over six-, 12-, and 24-month horizons. As of the third quarter, the model points to a declining, but still somewhat elevated, risk of recession. This demonstrates that the economy is on a path to recovery, but that recovery is fragile and could be disrupted by health policy failures or a drop in fiscal policy support. Our methodology2 can be found on Guggenheiminvestments.com.

Recession Probability Model3


Naturally, there are substantial risks when forecasting the business cycle. Nevertheless, we believe that successful investing requires a roadmap, as with any other endeavor. Our investment team uses this roadmap to help guide our portfolio management decisions, in order to seek superior risk-adjusted performance over time and across cycles.

Interval Since Last Pullback

While there is a relationship between the days since the end of the last correction and the magnitude of pullback, as shown on the following page, the majority of pullbacks during non-recessionary periods registered declines under 20 percent. As we discussed earlier, pullbacks falling within the 5–20 percent range historically experience recovery periods of one to four months. These are not periods typically associated with severe economic deterioration, and do not necessarily represent a signal to reduce equity exposure. As of the date of this analysis (11.13.2020), there had been 235 days since a non-recessionary pullback of greater than 10 percent.

Ex Recession S&P 500 Corrections (>10% Decline)4

Since 1962


Putting Pullbacks in Perspective

Pullbacks are often not a time to panic and should rather be used as a reason to analyze and assess. Under certain circumstances, it may even be the case that a pullback represents an attractive buying opportunity for certain portfolios. The benefit of gaining reliable market and economic perspective is essential in preparing for market pullbacks. Rather than act on emotion, it’s important to put these events in context to determine what they mean.

Working with your financial advisor, you may then better assess any potential impact on your portfolio and implement a proper course of action, if any is necessary, that is in line with your investment objectives.

To learn more, speak to your financial advisor about Guggenheim Investments’ timely insights and thought leadership.

To learn more, speak to your financial advisor about Guggenheim Investments’ timely insights and thought leadership.


1 Data as of 9.30.2020. Copyright 2020 Ned Davis Research, Inc. Further distribution prohibited without prior permission. All rights reserved. See NDR disclaimer at https://www.ndr.com/copyright.html. For data vendor disclaimers refer to www.ndr.com/vendorinfo.
2 Visit page www.guggenheiminvestments.com/perspectives/macroeconomic-research/forecasting-the-next-recession.
3 Hypothetical Illustration. The Recession Probability Model is a new model with no prior history of forecasting recessions. Its future accuracy cannot be guaranteed. Actual results may vary significantly from the results shown. This illustration is not representative of any Guggenheim Investments product. Source: Haver Analytics, Bloomberg, Guggenheim Investments. Data as of 9.30.2020. Shaded areas represent periods of recession.
4 Source: Guggenheim Investments. Data as of 11.13.2020.

Any overviews herein are intended to be general in nature and do not constitute investment, tax, or legal advice.

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