Since the market flirted with a ‘market correction’ in recent weeks it might be helpful to put that decline, and the term, in historical context.
Our analysis suggests that while market ‘corrections’ are relatively common, historically they have been mostly short-lived market setbacks that play out over a few months, not a few years. While most years stumble through rough patches, the important thing is that by the end of the year, the vast majority of the time the market has been in the black.
With this in mind, it is important to acknowledge that while equity markets can be uncomfortably volatile, it may be possible for long-term investors committed to their investment strategy to ride out volatility and avoid the temptation for costly knee-jerk responses to market turmoil. While there are a number of risks on the horizon, namely upside risks to inflation and interest rates, we think on balance there is a relatively low likelihood for a recession this year, and, hence, we assign a low probability to an impending ‘bear market’.
More likely, we think choppy markets will prevail in the coming weeks and months until the outlook for inflation and monetary policy becomes clearer. The market turmoil that has kicked off 2022 may prove to be similar to typical corrections from the past. That is, playing out uncomfortably over the next few months, but ultimately may be only a temporary a temporary setback and behind us by the time the second half of the year arrives when much of the current uncertainty roiling markets has hopefully faded.
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