Staying Calm in a Volatile Market
The Stock Market Pulls Back More Than 10% Routinely.
If you're an investor, a frequent piece of advice you’ve likely heard is to "stay the course." Why? Because market volatility is normal—pullbacks of more than 10% happen more regularly than you might think. In fact, on average, they occur roughly every 14 months. Stock market behavior follows cycles influenced by economic fundamentals, investor sentiment, and global events.
Surprised? It’s a pattern that holds strong over decades of market data and understanding it can reshape how you view the ups and downs of investing.
A Look at the Numbers
From 1980 to the present, (over 40 years) the stock market has pulled back by 10% or more every 14 months on average. This statistic isn’t just a blip on the radar; it's a consistent feature of market behavior. When we talk about a "pullback," we refer to a temporary decline of 10% to 20% from recent highs. While they may seem alarming in the short term, they are actually quite common.
There is also evidence that shows that significant global events, such as wars, pandemics, and climate-related disasters, has led to more dramatic market corrections or pullbacks.
Major Market Pullbacks Since 1980:
1987 - Black Monday: The S&P 500 fell by around 33% in a single day (October 19, 1987).
1990: During the Gulf War, the market pulled back by approximately 19%.
2000-2002 - Dot-Com Bubble: Over this period, the market dropped by over 49%.
2007-2009 - Global Financial Crisis: The market plunged by about 57%.
2011: A correction of around 19.4% occurred, driven by fears of a global economic slowdown and U.S. debt issues.
2018: The market saw two pullbacks—one early in the year (10% and another in December (19.8%). These corrections were significant, with the December drop being particularly severe, nearly reaching the 20% threshold that typically defines a bear market.
2020 - COVID-19 Crash: The market dropped by approximately 34% from February to March.
The most recent stock market pullback exceeding 10% occurred between late June and early July 2024, when several experts predicted that the S&P 500 could drop due to economic conditions.
Several factors contributed to this correction, including concerns over high inflation, slower economic growth, and potential delays in Federal Reserve interest rate cuts. These economic pressures triggered a market drop, in the summer of 2024, pulling the S&P 500 down by about 10%
Analysts pointed out that the market was overvalued, inflation remained high, and economic growth was slowing.
During the stock market pullback between late June and early July 2024, different industry sectors experienced varying levels of impact. Notably, the technology sector was one of the hardest hit, with a decline of about 3.3%, driven by the cooling enthusiasm around artificial intelligence (AI) investments, which had previously fueled a significant portion of market gains. Companies like Nvidia, Meta and Microsoft saw their stocks dip as investors re-evaluated their valuations amidst rising concerns of overvaluation, contributing to the broader market downturn.
Healthcare stocks were also hit hard, with companies like Edwards Lifesciences and DexCom seeing significant drops due to missed earnings expectations and weaker demand. This sector's struggles added downward pressure to the market.
Certain consumer-facing companies, particularly in the restaurant and retail sectors, also underperformed. For instance, Lamb Weston and Domino's Pizza reported lower-than-expected sales, contributing to declines in this sector.
While these sectors saw notable declines, more defensive sectors like utilities, real estate, and financials performed relatively better or even gained during this period. Real estate, utilities, and financials showed resilience, posting gains of 6-7% during the same period. These sectors benefited from lower interest rate expectations, making them attractive to investors seeking stability amidst market volatility.
However, the significant weight of the technology and healthcare sectors in the overall market meant that their declines were enough to pull the market down by 10%.
Market corrections of this magnitude are rather common, typically occurring every 14 to 19 months.
Given that stock market pullbacks of 10% or more occur on average every 14 months, and the most recent pullback occurred between late June and early July 2024, the next market pullback is likely to happen around August to September 2025.
Here's why these pullbacks happen and why investors shouldn't panic.
Economic Uncertainty: Economic reports, interest rate changes, or geopolitical events often trigger market pullbacks. When investors react to uncertainties, prices fall as people rush to sell.
Overvaluation: When stocks become overpriced due to an extended rally, a pullback can serve as a correction, restoring prices to more reasonable levels.
Natural Market Cycles: Financial markets, like any system, go through cycles of expansion and contraction. A 10% pullback can be part of the normal rhythm of growth, consolidation, and recovery.
The sectors most affected during a pullback often vary based on the specific economic drivers and market conditions at the time. While some sectors like technology and consumer discretionary are more volatile and therefore more frequently impacted, the exact pattern can change from one pullback to the next. Defensive sectors such as utilities and consumer staples tend to be more resilient but are not immune to broader market downturns.
Economic Conditions
When stock market pullbacks occur, the industry sectors affected are not always the same. The impact on sectors varies based on the underlying economic, financial, and market conditions at the time of the pullback. Several factors determine which sectors are hit hardest during a correction.
Inflationary Periods: Sectors like consumer staples and utilities tend to perform better during high inflation due to their stability and necessity, while sectors like technology or consumer discretionary may suffer due to their sensitivity to changes in consumer spending and interest rates.
Recessions: In periods leading up to or during a recession, cyclical sectors such as industrials, energy, and materials are typically more affected as demand for products and raw materials declines. On the other hand, defensive sectors like healthcare and utilities often fare better.
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Market Valuation
In cases where a sector is perceived as overvalued, it can be disproportionately affected during a pullback. For instance, the technology sector—particularly AI-related stocks—suffered during the 2024 pullback due to high valuations after a period of rapid growth.
Sector Rotation: Investors often rotate out of sectors that have seen extensive gains. For example, in some pullbacks, investors may move away from technology and into sectors like energy or financials, depending on growth expectations and interest rate outlooks.
Interest Rates
Rising Rates: When interest rates are expected to rise, sectors like real estate and utilities, which rely on heavy borrowing, often underperform. In contrast, financials such as banks may benefit from higher interest rates.
Rate Cuts: Sectors like consumer discretionary and technology can rebound strongly when interest rates are expected to be cut, as borrowing costs decline, encouraging growth and spending.
Sector-Specific Risks
Some pullbacks are driven by sector-specific issues. For example, healthcare might be hit by regulatory changes, or energy might suffer due to falling oil prices. These sector-specific shocks mean that the impact of pullbacks can vary widely depending on the cause.
What Pullbacks Mean for Investors
It's easy to feel anxious when the market drops 10% or more. However, understanding that these declines happen frequently—and are often followed by recoveries—can help you navigate the noise. In fact, trying to time the market or overreacting to these pullbacks can do more harm than good.
Some key things to keep in mind:
Pullbacks Are Temporary: Historically, the market recovers after a decline, and those who stay invested tend to benefit over the long term.
Opportunities for Investors: Market pullbacks can create buying opportunities. Stocks often go on sale during these periods, presenting a chance for disciplined investors to buy at lower prices.
The integration of AI with traditional analysis represents a significant advancement in financial forecasting. By leveraging both data-driven insights and human expertise, analysts can navigate market complexities more effectively and make informed decisions that account for both quantitative and qualitative factors.
Several academic studies have shown that integrating AI and machine learning techniques into financial analysis has significantly enhanced predictive accuracy. For example, a study published in the Journal of Financial Markets found that machine learning models outperformed traditional statistical models in predicting stock returns.
A performance comparison of machine learning models for stock market prediction with novel investment strategy - PMC ( nih.gov )
Artificial intelligence in Finance: a comprehensive review through bibliometric and content analysis | SN Business & Economics ( springer.com )
A report by the Alternative Investment Management Association (AIMA) indicated that hedge funds using AI and machine learning techniques report better performance compared to those relying solely on traditional investment strategies.
Press Release: Getting in pole position - How hedge funds are leveraging Gen AI to get ahead ( aima.org )
Focus on Long-Term Goals: A short-term decline of 10% might feel big in the moment, but when you consider a long-term investment horizon of 10, 20, or 30 years, these fluctuations become much smaller in context.
Staying Calm in a Volatile Market
Since 1980, there have been dozens of instances where the market has dropped by 10% or more. Despite this, the overall trend of the market has been upward, with average annual returns in the 8-10% range for major indices like the S&P 500. This tells us that volatility and pullbacks are part of the investment experience, but they don’t define it.
When you see a 10% pullback on the news or in your portfolio, remember that it’s not unusual. It's part of the cycle. By staying calm, focusing on your long-term goals, and potentially taking advantage of buying opportunities, you can better navigate the market’s ups and downs.
Final Thoughts
Market pullbacks of 10% or more are regular occurrences, happening every 14 months on average since 1980. While they may feel unnerving, these drops are a natural part of the market cycle. By understanding this, you can resist the urge to panic during downturns and instead focus on long-term growth. In fact, the savvy investor may even see these pullbacks as opportunities to strengthen their portfolio.
Next time the market pulls back, instead of reacting with fear, you can respond with confidence, knowing that this too is part of the market’s steady march forward.