The trading session to start this week was especially choppy. The S&P 500 had an intraday decline of as much as 4% on Monday before rallying and finishing the day slightly positive. Near the lows of the day, the index briefly joined the technology-heavy Nasdaq Composite in a technical correction⁽¹⁾. At one point during the day, the S&P 500 was on pace for its worst start to a year ever, with the year-to-date return falling as low as -11.4%.

When stocks dip the way they have in recent weeks, investors tend to get jittery. This can be seen in sentiment data, with some measures showing individual investors have their most pessimistic outlook for stocks since the middle of 2020⁽²⁾. During periods like this, it is important for investors to remember that volatility is a normal feature of the stock market and does not need to be feared.

Selloffs like the one we are experiencing, and even much larger ones, occur regularly. With valuations currently stretched, a price decline can be a healthy way to clear some froth out of the marketplace. Additionally, the economy has been growing at a solid clip, and earnings for the most recent quarter are again expected to be strong. Allowing business fundamentals to catch up to stock prices is a way to set the market up for sustainable appreciation moving forward.

The chart below from Dimensional Fund Advisors (DFA) illustrates the regularity of stock selloffs. In the twenty years between 2001 and 2020, there was only one year where the S&P 500 was not down at least 5% at some point. A few other observations from the chart:

1. Over half of the years (13/20) experienced a correction (> 10% loss)
2. Nearly half of the years (7/20) experienced a bear market (> 20% loss)
3. Even the best years for the stock market came with sizable intra-year declines

Source: Dimensional Fund Advisors (DFA)

Despite all of those intra-year selloffs, the market returned 322% over the full period. If we included 2021, the cumulative return would jump to 444%. Diversified investors that were chased out of the market by volatility may have missed out on a tremendous wealth-building opportunity.

1. A correction generally refers to a price decline of at least 10%.

2. According to the American Association of Individual Investors (AAII) Sentiment Survey

WEEK IN REVIEW

• Earnings growth for the fourth quarter was projected at 21.4% YoY as of the end of December, according to FactSet. With 4% of S&P 500 companies having reported, the blended growth rate estimate (incorporating actual results where applicable) has increased to 21.8%.
• All eyes will be on the year’s first Federal Reserve meeting that concludes this Wednesday. The market is not expecting the first rate hike to occur until the March meeting, but investors will parse the post-meeting statement and press conference for clues on the expected timing and pace of hikes that are coming this year.
• Aside from the Fed announcement and press conference with Chair Powell on Wednesday, look for Jobless claims, durable goods orders, and the first estimate of Q4 GDP on Thursday. On Friday, we will get another look at December inflation with the Fed’s preferred gauge: the Personal Consumption Expenditures (PCE).

ECONOMIC CALENDAR

Source: MarketWatch

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MARKETS AT A GLANCE

Source: Morningstar Direct.

Source: Morningstar Direct.

Source: Treasury.gov

Source: Treasury.gov

Source: FRED Database & ICE Benchmark Administration Limited (IBA)

Source: FRED Database & ICE Benchmark Administration Limited (IBA)

IMPORTANT DISCLOSURE INFORMATION