While pullbacks can be unnerving, they will not generally undermine a well-diversified portfolio. Assessment of their impact on investor portfolios should be informed by historical perspective, not emotion.

Pullbacks & bouncebacks

We can gain important perspective on market pullbacks by considering post-World War II declines in the S&P 500 Index. The majority of declines fall within the 5%–10% range with an average recovery time of approximately one month, while declines between 10%–20% have an average recovery period of approximately four months. Pullbacks within these ranges are not uncommon, occurring frequently during the normal market cycle. While pullbacks can be emotionally unnerving, they will not generally undermine a well-diversified portfolio and are not necessarily signals for panic. Even more severe pullbacks of 20%–40% registered an average recovery period of only 14 months.

Sources: Guggenheim Investments, Bloomberg, Ned Davis Research. Data as of 2/7/2025. Past performance does not guarantee future results.

In contrast, pullbacks of 40% or more, while occurring much less frequently, post an average recovery time of 58 months and can potentially compromise an investor’s financial plan. Pullbacks above 20% (including all pullbacks above 40%), which have registered the longest recovery periods, have been associated with economic recessions. When evaluating a market pullback, the probability of a recession is a key insight to consider when determining whether to reduce equity exposure.

While recessions are readily identifiable in hindsight, prospectively they can be difficult to spot. This makes access to reliable market analysis all the more important when determining the probability of a recession.

Where are we now?

The U.S. economy has good momentum heading into 2025, but the policy outlook from Washington elevates uncertainty. Recent economic data have been solid, with fourth-quarter real gross domestic product (GDP) coming in at an annualized rate of 2.3%. The outlook for consumer spending remains positive, supported by healthy growth in inflation-adjusted labor income and a wealth effect driven by rising asset prices. Financial conditions have also turned more supportive as credit growth is reaccelerating, and optimism about artificial intelligence induces a positive outlook for capex. Disinflationary progress has stalled a bit in recent months, but fundamentals point to a further slowdown in inflation as wage pressures and housing inflation ease further.

With the new administration taking office, we expect a boost to both consumer and business sentiment, aided by expectations of deregulation and further tax cuts. Post-election surveys have already shown increased optimism about the outlook, which could support consumption, investment, and hiring in coming months. Some of the administration’s proposed policies—such as tariffs and immigration—could weigh on growth if fully implemented, but altogether, we see moderate growth in the U.S. economy in 2025 as these policy shifts play out.

“Given underlying sources of resilience in the economy, the Fed may be successful in moderating any growth slowdown with appropriate policy easing.”

Recession risk has moderated but remains higher than normal

The business cycle is one of the most important drivers of investment performance. It is therefore critical for investors to have a well-informed view on the business cycle so portfolio allocations can be adjusted accordingly. When the Fed began to tighten monetary policy in 2022, many expected a recession to ensue. While the economy has proven surprisingly resilient, we remain on watch for recession warning signs.

Interval since the last pullback

While there is a relationship between the days since the end of the last correction and the magnitude of a pullback, as shown in Figure 1, the majority of pullbacks during nonrecessionary periods registered declines under 20%. As we discussed earlier, pullbacks falling within the 5%–20% range historically experience recovery periods of one to four months. These are not periods typically associated with severe economic deterioration and do not necessarily represent a signal to reduce equity exposure. As of the date of this analysis (Feb. 7, 2025), it has been 469 days since the last decline of greater than 10%.

Sources: Guggenheim Investments, Bloomberg. Data as of 2/7/2025. Past performance does not guarantee future results.

Putting pullbacks in perspective

Pullbacks are often not a time to panic and should rather be used as a reason to analyze and assess. Under certain circumstances, it may even be the case that a pullback represents an attractive buying opportunity for certain portfolios. The benefit of gaining reliable market and economic perspective is essential in preparing for market pullbacks. Rather than act on emotion, it’s important to put these events in context to determine what they mean.

Working with a financial advisor, investors may then better assess any potential impact on their portfolios and implement a proper course of action, if any is necessary, that is in line with their investment objectives.

Editor’s note: Following the initial publication of this commentary, the S&P 500 Index declined over 10% in March and April 2025. These pullbacks are not reflected in the data shown in Table 1 and Figure 1.

The opinions expressed in this article are those of the author and the sources cited and do not necessarily represent the views of Proactive Advisor Magazine. This material is presented for educational purposes only.

This article is based on commentary published in the spring of 2025 from Guggenheim Investments. Reprinted with permission from Guggenheim Investments.

To learn more, speak to your financial advisor about Guggenheim Investments’ timely insights and thought leadership.

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