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Zoom Out, We’ve Been Here Before: A Short History of Market Corrections

The S&P 500 fell more than 7% last week after the Federal Reserve raised rates to their highest point since the 2008 crisis. It came with a warning that interest rates would settle into a higher point than originally thought; the Fed now expects interest rates to hit 4.6% by the middle of next year before dropping in 2024 and 2025.

That news unsettled scores of investors, who took their cash and headed for the bank. Billions of dollars left the market and headed for the place that offered the highest interest rate, with the promise that their money will make a nearly risk-free 3% in a high-yield bank account.

Naturally, people are upset about the market’s performance. Retirement and brokerage accounts across America have taken substantial hits and people want easy targets to blame. The reality is much more complicated, though: markets are risky, fickle things. They correct all the time.

You don’t have to believe us, you can look at every recession and correction leading up to the COVID-19 pandemic.

S&P 500 PERFORMANCE OVER TIME

Graphic Via  [The Fifth Person]

There are four very dangerous words in investing: “this time is different”

As you can see, there have been a lot of times where “things have been different” and the markets have continued to march north.

Four of the events on this slide are of particular consequence because of how “Doomer” they are. We’d like to call your attention to Black Monday (1987) and the recession that followed, the 2000 Dot-com Bubble, and the ‘08 crash. They are all dramatic, but they were observably worse than the 2022 correction.

And now, we’d like to call attention to where the graph cuts off — the 30% crash at the start of the COVID-19 pandemic, the months-long rally to regain lost ground, and where the S&P 500 lies now:

S&P 500 performance since 2020

Graphic Via [TradingView]

Even after falling 23% since the start of 2022, America’s largest index is still 9% above its all-time high set right before the COVID-19 pandemic. And if you bought the absolute bottom of the market in March 2020, you would be up more than 60%.

The reality is that you’re not going to time the markets — you can try, but you will probably get it wrong. But buying dips, if you have the wherewithal and it fits within your financial goals, has proven successful over the long-run again and again. As you can see, dollar cost averaging into America’s largest markets is surprisingly easy and possibly surprisingly profitable.

The reality is that the 2022 correction could last awhile. There are many factors affecting why the markets are down, but for many investors there is little to fret about. Despite what partisans and politicos say, this time is not different and it is not special.

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