On Friday, January 21, the S&P 500 Index closed below its 200-day moving average for the first time since June 2020 and by mid-day on Monday was 10% below its all-time highs, one of the fastest 10% declines from the start of a year on record.
“Big market swings tend to signal more market volatility ahead,” explained LPL Financial Asset Allocation Strategist Barry Gilbert. “But after these kinds of pullbacks there’s an increased likelihood of above-average returns over the next three and six months.”
As shown in the LPL Chart of the day, after the S&P 500 Index has closed below its 200-day moving average for the first time in at least a month, the average return over the next three and six months as well as the likelihood of a positive return is higher than usual. But once you look forward a whole year performance tends to be back in line with historical performance.
Even though we believe it’s important to take a longer-term view of recent market volatility, Monday was an extraordinary day.
- The S&P 500 Index was down 4% at the intraday lows, but finished higher. Only two other times in history has it done that (both in October 2008).
- It rallied 4.4% off the lows, the largest reversal since March 26, 2020.
- It was one of the fastest 10% declines for the S&P 500 Index to start a year ever (on an intraday basis).
- Volume was huge as well, consistent with a potential bottom forming. This can take time, but the reversal was a positive step.
Volatile markets are nerve racking, but history suggests that they should not derail investors from sticking with their long-term plan. In fact, overreacting to volatile markets can create greater risks to achieving financial goals than underreacting for investors positioned with diversified portfolios aligned with their risk tolerance.
Despite the comeback, geopolitics has become an added market concern in early trading today. For some added thoughts on the potential market impact of geopolitical risks in Ukraine, see our blog posted earlier today.
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All index and market data from FactSet and MarketWatch.
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