Stock-market corrections can be good for returns. No, really.
Stock-market drawdowns aren’t necessarily bad for investors who can ride out the turmoil.
A look at the S&P 500’s performance since 1989 shows that corrections, or drawdowns of at least 10%, have occurred in 20 of the last 35 years, according to BlackRock’s Tony DeSpirito, global CIO of fundamental equities, who tallied the average pullback at 14% a year.
But higher volatility, as measured by the Cboe Volatility Index, known as Wall Street’s “fear gauge,” has actually produced higher short-term returns, according to BlackRock.
Historical data show that S&P 500 returns were about 5% higher six months after relatively muted stretches for the VIX — readings of 12 and below. But they rose to 16% six months after the VIX hit 29 or higher.
“The summer VIX spike, where levels hit a high of 65, quickly normalized. If historical precedent holds, moments like these could present attractive buying opportunities with potential for outsized short-term returns,” DeSpirito wrote.