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 15 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 80 (7) 1 1
10-20 29 (14) 4 4
20-40 9 (28) 11 15
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 5.2020)

In late 2017, we published our recession forecasting tools, noting that late-cycle symptoms pointed to a downturn beginning between the fourth quarter of 2019 and the second quarter of 2020, with a midpoint of February 2020. While we did not see a pandemic coming, it turns out that February was indeed the peak in the business cycle. What has unfolded since is an economic shock of unprecedented scale and scope. COVID-19, the deadliest pandemic in a century, has caused a steeper plunge in output and employment in two months than occurred during the first two years of the Great Depression.

While some countries and U.S. states are eyeing tentative steps to reopen their economies, we do not expect a genuine recovery until a vaccine has been developed, tested, approved, produced, and administered across the globe. This process is likely to take 18 months, but possibly longer. In the meantime, keeping the infection rate in check will require social distancing measures that stymie economic activity. Given millions of identified cases today and limited testing capabilities, a premature reopening would mean another spike in infections.

We expect the U.S. unemployment rate to rise to 20 percent in our base case, with a risk of 30 percent in the event of a second wave. The fall in employment in March and April alone represents a 50 standard deviation shock, and erased all the jobs gains of the preceding 10-year economic expansion. As personal, small business, and corporate bankruptcies mount, permanent damage is being done to the productive capacity of the economy, which will stunt the eventual recovery in output and corporate profits. It took nearly 10 years for the unemployment rate to return to the cycle low seen in 2007, and the current shock will likely be between three and five times more severe than the last financial crisis.

Importantly, the policy response has been much swifter and more aggressive this time around. The U.S. budget deficit is headed to the highest level since World War II and the Fed’s balance sheet could exceed $10 trillion by the end of the year. But even this policy response cannot make consumers spend or businesses invest amid staggering uncertainty.

The oil market is a microcosm of the tug of war between collapsing demand and an unprecedented policy response. Despite the largest and most widely coordinated oil supply cuts in history, oil inventories will likely approach storage capacity and could push prices into negative territory again. As we experienced in the last financial crisis, the persistence of macro stress means the risk is building of
a systemic credit event in the form of the failure a major financial institution or a large sovereign borrower.

The Coronavirus Has 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. At this stage, there is no doubt that the United States has quickly and forcefully been forced into a recession. This means that our focus has pivoted to understanding how deep the recession will be, and how to identify signs of recovery.

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 first quarter, the model continues to signal very high risk across all horizons, signaling that this downturn may not be as brief as many hope. Our methodology2 can be found on Guggenheiminvestments.com.

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.

Recession Probability Model3


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 (5.6.2020), there had been 43 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 3.31.2020. 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 3.31.2020. Shaded areas represent periods of recession.
4 Source: Guggenheim Investments. Data as of 5.6.2020.

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

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