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Quarterly Outlook

GLOBAL GROWTH  |  U.S.  |  October 2015
Welcome Back Volatility

The Recent Market Turbulence Is a Reminder That Declines Have Been Relatively Routine Events

S&P 500 Declines: 1975–2014


Total Number




3 times per year



0.8 times per year or once about every 1.3 years



0.3 times per year or once about every 3.6 years



0.1 times per year or once about every 8.0 years

Despite Average Intrayear Drops of 14%, S&P 500 Index Returns Were Positive in 31 of 40 Calendar Years

Despite average intrayear drops of 14%, annual price returns were positive in 31 of 40 calendar years

Price return for 2011 was 0.0%

Source: Rimes. S&P 500 annual returns, as represented in the bar chart, do not include dividends. Intrayear drops refer to the largest decline in each calendar year. Total number of positive years and average intrayear drops are for the 40 years ended 12/31/14. Average frequency of declines, as shown in the table, assumes 50% recovery of lost value. Investors cannot invest directly in an index.

The old normal has become the new normal. This summer’s market correction proved to be an unpleasant reminder that stock prices don’t go up forever. The downturn, which was the first decline of 10% or more in more than four years, disrupted the third-longest equity rally in U.S. market history.

Sharp market drops can unnerve even the most seasoned investors, but a look back over the past 40 years shows that declines are a relatively routine occurrence. As the table above left shows, drops of 10% or more have occurred about once a year.

While there have been significant setbacks in each of the last 40 calendar years, the S&P 500 recorded a positive return in 31 of those years, or 78% of the time. While this provides important perspective, it is important to remember that past results are not predictive of results in future periods.

What’s more, conditions in the U.S. remain generally upbeat. After months of stagnation, U.S. consumer spending turned up in May, and unemployment dipped to 5.3% in June. Corporate cash as a percentage of current assets for S&P 500 companies also rose to a record high by some measures.

However, given that earnings growth has slowed recently and valuations in some areas of the market have become stretched in recent months, we believe that selective investing will be essential going forward.

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