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The strong equity rebound since March 2020 may be in the midst of a pause, but economic and policy conditions remain favorable for risk assets.

Temporary dips are common in bull markets chart

As much as investors might wish otherwise, periods of equity market volatility and temporary pullbacks are a natural and unavoidable part of the market cycle. Coming off of a particularly strong period for equities that began in March 2020, it shouldn’t be surprising that they would take a breather at some point. By some measures, that “some point” appears to be here.

The desire to take the complexity of the market and boil it down to a simple explanation is normal. What has caused the market to pause — and even take some steps backward — in recent weeks? In truth, there’s no single catalyst, but indications that Fed policymakers may be accelerating bond-purchase tapering and rate hikes, the growing sense that economic growth may have peaked in the United States, and the emergence of the COVID-19 Delta variant have all contributed to the shift in sentiment. The result has been a temporary step back for equities, most notably in cyclical sectors, value stocks, and small caps.

Still, the increase in volatility shouldn’t be alarming and is best viewed in perspective. Over the last 40 years, the S&P 500 has posted positive calendar-year returns nearly three-quarters of the time. Even in those positive years, a temporary market correction is commonplace, with the average pullback topping 10%. Conversely, bear markets, defined as a decline of 20% or more, are much less common and are typically associated with recessions.

The bottom line: The recent downdraft in equities isn’t unusual within the context of a bull market and a slowing (but growing) economy. If the economy settles into a sustainable growth pace and continues to expand as expected, risk assets should benefit, and could particularly support cyclical sectors, value-oriented strategies, and small cap stocks.

Past performance does not guarantee future results. All investments include risk and have the potential for loss as well as gain.

Data sources for peer group comparisons, returns, and standard statistical data are provided by the sources referenced and are based on data obtained from recognized statistical services or other sources believed to be reliable. However, some or all of the information has not been verified prior to the analysis, and we do not make any representations as to its accuracy or completeness. Any analysis nonfactual in nature constitutes only current opinions, which are subject to change. Benchmarks or indices are included for information purposes only to reflect the current market environment; no index is a directly tradable investment. There may be instances when consultant opinions regarding any fundamental or quantitative analysis may not agree.

Plante Moran Financial Advisors (PMFA) publishes this update to convey general information about market conditions and not for the purpose of providing investment advice. Investment in any of the companies or sectors mentioned herein may not be appropriate for you. You should consult a representative from PMFA for investment advice regarding your own situation.

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