Stock market: no worries about the next correction

Investors who would have made purchases on the DAX or S&P 500 when prices hit an annual high would, up until now, not have suffered losses any greater than 3% – at no time did it fall further. This reflects our analysis of what are known as “drawdowns”; essentially, the maximum sustained losses within a period under review (in this case the calendar year).

On average, the leading German index has corrected from localised highs to subsequent lows by 18% on an intra-year basis since 1975 (Euro Stoxx 50: 19%; S&P 500: 14%), although this was more than 20% in 13 of the past 43 years. The S&P corrected by more than 20% just five times and between 10%-20% thirteen times.

 

What do these statistics reveal?

  1. Initially, they are the proof that 2017 as an investment year has been pretty quiet so far. The record-low levels of volatility on both sides of the Atlantic have also reflected this scenario for several weeks now – this also applies to asset classes other than shares.
  2. Investors should not be deceived by the narrow margin of fluctuation. The classification in a historical context reveals how often corrections actually take place on the stock market and that the current development is in no way representative. The stock markets are also not immune to a sudden change in market sentiment in 2017.
  3. Only deciding to sell shares when a correction takes place is often an error. Share investments have, disregarding temporary corrections, primarily delivered positive returns over the past few years. On average, the trend has clearly been upwards since 1975: since then, the DAX has risen by an average of 7.8% and the S&P by 8.2%. Selling shares during a sharp correction phase means nothing more than actually realising losses and restricting your chances of achieving new returns. Studies show that investors have no chance of coming close to replicating the average long-term return of a share index when they miss out on the best 10 or 20 days in historical terms. With corrections it is important to distinguish between “normal” ones (these are mostly exclusively sentiment-driven corrections) and “justified” corrections (e.g. corrections which signify the onset of a recession or a burst bubble). In the case of the latter, selling off stocks during a correction makes sense, as experience dictates that these are often above average. Nevertheless, making this distinction is usually an ideal world scenario and is therefore mostly only possible in retrospect.

Even if it seems to initially contradict human intuition, investors should not panic about a potential correction. Corrections often represent the best time to make purchases. After all, in the long term, they offer the best protection against the imminent loss of purchase power, which represents a strong argument in favour in an environment shaped by normal inflation and zero interest rates

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