Investment Update – January 2022

It is always a little risky to celebrate too soon, but it seems that the worst of the stock market correction in early 2022 is behind us. However, it’s remarkable to see just how many market watchers were surprised by the sudden movement on the market. After all, there have always been stock market corrections.

Disregarding prolonged bear markets (for example, during the financial crisis or more recently during the first wave of Covid infections when markets fell by more than 20%), there have been a total of 22 corrections since 1967 in which the US S&P500 index lost between 10% and 20% of its value. That is one every two and a half years. Generally speaking, the stock market underwent a correction of about 13%, based on the median movement.

So much for the similarities. The way to the bottom and the way back up again are very different. An ‘average’ correction lasts 47 trading days, or about two and a half calendar months. That is the time it takes to hit the low point. After that, it takes the stock market just a little longer to get back to its pre-correction level (roughly 55 trading days, or about two and three-quarter calendar months). In the end, an average correction lasts just over five months.

There is also a considerable difference in the length of time upward and downward movements last, however. For example, the correction that started in October 1983 needed no fewer than 180 trading days to fall 14% to its lowest level. In January 2018, the market needed just nine trading days to plunge 10% before it started moving up again. The recovery phase varies as much if not more. The correction of September 1978 needed 45 trading days to tumble 14%, but took a good 179 days to get back to its original level. Conversely, there was a lightening recovery in the autumn of 1999, when the S&P500 eliminated a 12% market correction in 22 days. It was as though nothing had ever happened.

If we take the correction of 2022 and assume that the S&P hit its low on 27 January, we can conclude that 2022 kicked off with one of the fastest corrections in history, i.e. a loss of 10% in 17 trading days. Since then, the road to recovery has got off to a robust start, with half of the stock market correction being eliminated in no fewer than three trading days.

We are keeping our fingers crossed that this can continue for some time to come and that 2022 turns out to be a more than decent year for stock markets, something that many investors strongly doubted last week. KBC is adhering to a scenario in which positive stock market returns are expected in 2022. This is encouraging, although it should be remembered that they never move up in a straight line. Occasional corrections are healthy and part and parcel of market reality.