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 8 (27) 12 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 2.2020)

U.S. real gross domestic product (GDP) growth held steady at 2.1 percent, annualized in the fourth quarter. This is slightly above our estimate of potential growth, but the details revealed a less positive underlying trend. A sharp reduction in imports led to an outsized 1.5 percentage point contribution from trade, which was more than offset by a smaller contribution from personal consumption expenditures (PCE) and a contraction in business investment in inventories and capital expenditure (capex).

A strong labor market continues to underpin the outlook for economic growth in the near-term, with payroll gains averaging 211,000 over the last three months. Inflation continues to undershoot the Fed’s target, as measured by the core price deflator for PCE, which softened to 1.3 percent annualized in the fourth quarter. Looking ahead, the slowdown in the Leading Economic Index (LEI) to a cycle low of 0.1 percent year-over-year in December, raises the specter of weaker growth this year. However, last year’s stock market rally bodes well for a pickup in leading indicators in the first half of 2020, as our analysis shows that stocks tend to lead the LEI by about six months.

Several factors could temper any bounce in growth in early 2020, starting with the tendency for reported first quarter growth to be weak due to seasonal adjustment issues. More substantively, Boeing has temporarily halted production of 737 Max airplanes. Production will likely be suspended for at least the first quarter, reducing annualized real GDP growth by 0.5 percentage point. Once production resumes, there should be an offsetting boost to growth, likely in the second half of the year.

Perhaps most significantly, the coronavirus will hit growth in China in early 2020, with spillovers that extend across Asia and beyond. Measures to limit transmission are having a significant impact on China’s transportation, energy, retail, hospitality, and manufacturing industries. Compared to the SARS outbreak in 2003, the country’s much larger services sector and significantly more aggressive government response means that the economic impact could be larger today. The outbreak comes at a difficult time for the Chinese economy. At 6.0 percent, real GDP growth in 2019 was the weakest in a generation, and the country’s massive debt load limits authorities’ flexibility to shore up the economy. China’s share of global GDP has more than tripled since 2003, and it has become a more integral part of global trade and international financial markets, amplifying the potential economic impact.

The Fed’s ‘Mid-Cycle’ Adjustment appears to be successful.

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, with the current U.S. expansion showing signs of aging, our focus is on projecting the timing of the next downturn.

Guggenheim has developed several tools to guide this effort. The last several expansions have shown similar patterns leading up to a recession. We have created a Recession Dashboard of six indicators that have exhibited consistent cyclical behavior, and that can be tracked relatively well in real time. These six indicators include a measure of the unemployment gap, the stance of monetary policy, the shape of the yield curve, the LEI, changes in aggregate weekly hours worked, and changes in consumer retail spending. In addition to our dashboard of recession indicators, we have also developed an integrated Recession Probability Model that attempts to predict the probability of a recession over six-, 12-, and 24-month horizons. Our methodology2 and our latest recession update3 can be found on

Our proprietary Recession Probability Model suggests there is a 59 percent chance that a recession will begin in 12 months, and a 77 percent chance that it will arrive within the next two years.

Naturally, there are substantial risks when forecasting recession timing. 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 Model4


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 below, 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 (2.10.2020), there had been 410 days since a non-recessionary pullback of greater than 10 percent.

Ex Recession S&P 500 Corrections (>10% Decline)5

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.


1 Data as of 12.31.2019. Copyright 2019 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 Visit page www.guggenheiminvestments.com/perspectives/macroeconomic-research/2019-recession-update-will-rate-cuts-be-enough.
4 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 12.31.2019. Shaded areas represent periods of recession.
5 Source: Guggenheim Investments. Data as of 2.10.2020.

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