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Market corrections are challenging for investors of all types. This is due to their speed, unpredictability, and typically, the fact that underlying catalysts are somewhat unique with each episode. Also, easy answers to these dynamics are often difficult to come by at the moment. Related volatility, with schizophrenic up and down days can add to the challenge. However, when taking a multi-year 30,000-foot view, we start to see some similarities and realize that things aren’t really ‘different this time’.

Although it doesn’t provide much consolation while they’re happening, price corrections represent a normal phase in the price discovery process for any product in a traded market. In this sense, stocks are no different than oil barrels, lumber, houses, or metal bars—the meeting of supply and demand dictates the newest price to a marginal buyer. While markets are normally orderly, uncertainty over the future can cause market participants to look at an increasingly broad variety of probabilistic outcomes.

Although it doesn’t feel like two years ago already, the equity market corrected very quickly in March 2020, when the emergence of Covid-19 brought an unexpected pandemic not seen in the modern era, while also plenty of questions about the coming months. This brought on a -33% drop in the S&P 500 as the worst investor fears of widespread severe disease and economic shutdown took over. While many shutdowns did happen, and the economy did experience a pronounced recession, government fiscal and monetary stimulus were employed to help bridge the gap. Following these, and despite difficult and controversial social measures, the economy recovered. In fact, the stock market bounceback could be considered exceptional by its magnitude and speed: the S&P 500 index rose nearly 120% from its low on 3/23/2020 through 12/31/20211. While the economy has continued to gain ground toward pre-pandemic activity levels, this performance pattern is instructive as corrective periods can be followed by sharp recoveries—highlighting the importance of staying the course.

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