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 4.2021)

We upgraded our 2021 U.S. economic growth forecast during the first quarter from 5.5 percent to over 7 percent, factoring in more fiscal stimulus than previously anticipated. We see strength in the consumer sector and in housing activity. In addition, U.S. vaccinations remain at a robust pace, near 3 million doses per day as of late April. The United States is seeing the best-case scenario unfold in its vaccine rollout.

We saw meaningful improvement in the labor market in the first quarter and into the second quarter as states moved forward with business re-openings. The March payroll report showed 916,000 jobs added, with 156,000 more from revisions. We saw more positive news from seasonally adjusted initial jobless claims, which fell to 574,000 in the week ending April 17, the lowest level since the pandemic began. Standing in the way of additional labor market gains are local government restrictions on certain sectors, although easing of these restrictions is expected by summer.

Economic developments drove a sharp increase in U.S. Treasury yields. The market has pulled forward expectations of the next Federal Reserve (Fed) rate hike from December 2023 to March 2023, while repricing the long-run terminal fed funds rate estimate to 2.05 percent from just 0.55 percent last August. We do not expect the Fed to raise interest rates as early as the market is anticipating, even though we expect strong GDP growth in coming years.

Year-over-year inflation measures will rise over the next several months due to base effects, which may be compounded by supply chain disruptions in the goods sector and potential capacity constraints for certain services. However, we think these factors will prove to be short-lived, with base effects set to dampen inflation starting in the summer months. Moreover, the Fed is focused on generating sustainably higher inflation. Even if core inflation rises above the Fed’s 2 percent target in 2021, the Fed’s focus is on a long-term average of 2 percent. With years of shortfalls to make up, and the Fed now targeting labor market disparities as part of an expanded definition of full employment, we expect policymakers to remain resolutely patient. Any tapering of asset purchases will likely be deferred until later in 2022, with the first rate hike likely to come a few years after that.

The U.S. Economy Proved Surprisingly Resilient Against the Coronavirus

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 first quarter, we estimate the model points to very low risk of recession across all horizons. This demonstrates the early stages of a cyclical recovery, bolstered by extremely easy monetary and fiscal policy. 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

recession probability model

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 (4.23.2021), there had been 396 days since a non-recessionary pullback of greater than 10 percent.

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

Since 1962

recession probability model

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 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 ndr.com/copyright.html. For data vendor disclaimers, refer to 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 3.31.2021. Shaded areas represent periods of recession. Guggenheim’s Recession Probability Model attempts to predict the probability of a recession over six-, 12-, and 24-month horizons. We developed the model using the unemployment gap, the stance of monetary policy, the yield curve, and the Conference Board Leading Economic Index (LEI), as well as the share of cyclical sectors of the economy (durable goods consumption, housing, and business investment in equipment and intellectual property) as a percent of GDP.

4 Guggenheim Investments. Data as of 4.23.2021

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