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A Correction is No Reason to Exit the Market

Wells Fargo Investment Institute - October 24, 2018

S&P 500 Index total return (blue) and largest S&P 500 Index market drops (green) by calendar year (1988 through 2017)


Sources: FactSet and Wells Fargo Investment Institute, as of December 31, 2017. For illustrative purposes only. Severe intra-year corrections do not necessarily indicate subpar performance for the calendar year. Analysis was compiled using the daily price of the S&P 500 Total Return Index. Calendar-year drawdowns represent the largest market drops from peak to trough for each year. S&P 500 Index is a market capitalization-weighted index composed of 500 widely held common stocks that is generally considered representative of the U.S. stock market. An index is unmanaged and not available for direct investment. Past performance is no guarantee of future results. 


We believe investors need to put this October’s market correction in the proper perspective. From April 2 to September 20, when the S&P 500 Index closed at its all-time record high, the index jumped almost 14% higher with hardly any pauses or major pullbacks along the way.

Historically, stock market corrections—a drop of 10% or greater for the S&P 500 Index—are normal. In fact, they have occurred, on average, once every 357 days. The chart shows that, while severe corrections tend to occur swiftly and unexpectedly, they do not necessarily indicate subpar performance for equities in a calendar year. It’s important for investors to remember that stock-market volatility doesn’t lead to financial loss unless an investor sells.

What it may mean for investors

We view the recent weakness as part of the market’s transition from reflecting a low-growth/low-rate environment to a higher-growth/higher-rate environment and as a correction within a bull market, rather than an end to this bull market. We believe investors can take advantage by adding exposure to equities, especially in our favored asset classes: emerging markets, U.S. large caps, and U.S. mid caps. Our favored sectors within U.S. large-cap equities remain more cyclical areas: Financial, Industrials, Consumer Discretionary and Health Care.

-Investment StrategyTeam

This chart was excerpted from the October 2018 “Market Charts: Turning data into knowledge.”