Stocks plunged on Tuesday, sending the
S&P 500 Index
in correction territory. It may be time to buy, for investors with a longer time horizon.
On Tuesday, all three major indices fell more than 1%. That came as Russia sent troops to Ukraine, signifying the country’s desire to amass power. Markets understand that Western countries may impose sanctions on Russian oil, although President Joe Biden did not announce such measures in his speech on Tuesday. If those sanctions come to fruition, the global supply of oil would fall, driving up the price. That could hurt a consumer already dealing with high inflation. Tuesday’s drop sent the S&P 500 into correction territory, defined as a 10% drop from a recent high; the last one was seen in early January for the index.
Undoubtedly, most of the correction has been due to tighter monetary policy by the Federal Reserve. The Fed is expected to raise interest rates several times this year to stave off high inflation, a move that would drag down economic growth. In addition, the higher bond yields brought about by the expected change in policy reduce the value of future earnings, driving stock valuations down.
However, there is good news: Stocks tend to do well just after entering correction territory. The S&P 500’s average gain over the 12 months after a close in correction territory is 9.3% since 1998, according to Dow Jones Market data. The index sees gains in that time frame about two-thirds of the time.
And when the index doesn’t post a gain for the year following a close in correction territory, it’s often because there’s a major economic problem. After closing in correction territory in late November 2007, the S&P 500 fell 37% in the following 12 months. The market continued to reflect what would become the Great Recession, the result of the Great Financial Crisis. The economic outlook was still nowhere near showing signs of improvement. However, in late October 2008, after some gains, the S&P 500 closed in correction territory once again, but was up 22% in 2009. Markets were pricing in the eventual recovery.
Hopefully this correction looks more like the kind that sets off a bull market. The economic risks related to Russia and the Fed’s stricter policy are what have the market lower. Investors are yet to see whether there will be sanctions, whether higher oil prices will even hit consumer spending hard, how many times the Fed will raise rates and what the economic impact will be.
The point is that there’s a good chance the stock market will do well over the next year, if we don’t head into a recession soon.
Email Jacob Sonenshine at email@example.com