In a 2019 report, Guggenheim noted that 5% to 10% corrections in the S&P have been regular occurrences.

They noted that there have been 84 drops of between 5% and 10% since 1946. This is more than one per year.

These small declines are usually short-lived and the market bounces back quickly. It takes an average of one month to recover from these losses.

Although deeper declines are possible, they happen less often.

A decline of 10%-20% has occurred 29 times since 1946 (roughly once every 2.5 years), 20-40% 9 times (about one every 8.5 years) or 40% more 3 times (every 25).

Two takeaways: First, most pullbacks above 20% have been associated with recessions (there have been 12 since 1946).

Second, for long-term investors, it tells you that even relatively rare but severe pullbacks of 20%-40% don’t last very long — only 14 months. 

Another way to slice the data is this: When dividends are factored in, the S&P has risen 72% of the time year-over-year since 1926.

It means about one fourth of all years are down in the market. The market can and does put together a string of down years.

However, this isn’t the norm. The opposite of this is actually true. More than half the time (57%), the S&P posts gains of 10% or more.

Could there be a longer-term, deeper correction? 

Bulls agree that the past 12 years were unusually profitable for investors in markets. 

Since 2009, the S&P 500 has averaged gains of roughly 15% a year, well above the historic returns of roughly 10% a year.

Many traders credit the Fed’s 5-percentage point annual outperformance to its ability to keep interest rates extremely low, making cheap money readily available for investors, and also pumping enormous amounts of money into our economy through expanding its balance sheet (now at $9 trillion).

If that is the case — and all or a good part of that excess gain is due to the Fed — than it is reasonable to expect that the Fed withdrawing liquidity and raising rates might account for a future period of sub-normal (below 10%) returns.

Vanguard believes so. Vanguard’s 2022 Economic and Market Outlook noted that the removal of policy support presents a new challenge to policymakers and poses new risks for financial markets.  

They described their long term outlook on equities “guarded”, noting that higher valuations and lower economic growth rates means they expect lower returns in the coming decade.

Is it possible to get returns that are lower than this? The expected returns for a 60/40 portfolio of stock/bonds will be approximately half that which investors have realized in the past decade, from 9% to 4%.

Vanguard doesn’t expect any negative returns; they just anticipate lower returns.

You heard it all day Monday: “The S&P 500 is 10% from its highs!” 

But how pertinent is this to average investors?

Do you know anyone who has invested all of their money at market tops and pulled all the losses at market bottom Monday? Although many people panic at bottoms of markets, few have ever actually invested their entire money in the market top.

The majority of people are involved in dollar-cost averaging, where they place money for many years. 

This means stocks will almost always pull back at a price higher than what you paid.