Goldman says corrections are buying opportunities and rarely turn into bear markets

Published Mon, Jan 31 20229:29 AM ESTUpdated Mon, Jan 31 202210:18 AM EST

The S & P 500 briefly fell into correction territory last week as the Federal Reserve's policy shift created massive gyrations in the market, but Goldman Sachs believes the drawdown marks a buying opportunity for investors. And if history is any guide, corrections rarely turn into bear markets unless the economy is heading into a recession, according to the Wall Street firm. "From a historical perspective, S & P 500 corrections are typically good buying opportunities," Goldman head of U.S. equity strategy David Kostin said in a note. "Market corrections are typically good buying opportunities if the economy is not entering into recession." The Fed said last week it will soon raise interest rates for the first time in more than three years as part of a broader tightening of historically easy monetary policy. The pivot sparked a turbulent week on Wall Street as investors struggled to re-price assets for interest rate risks. The S & P 500 is down 7% this month, falling 8% from its record high in early January; it's also on pace for its worst month since March 2020. At its lowest level last week, the equity benchmark dropped 10% from that all-time high. Technology shares led the steep sell-off in the new year as investors rotated out of high-flying sometimes-profitless names. The Nasdaq Composite has fallen about 12% in January and 15% from its record high. However, Goldman noted that 10% corrections are not unusual in a given calendar year. Since 1928, the S & P 500 has experienced a median calendar year peak-to-trough drawdown of 13%, with corrections greater than 10% during 62% of years, according to Goldman. There have been 33 S & P 500 corrections of 10% or more since 1950, and the median episode has lasted about five months and encompassed a peak-to-trough decline of 18%, Goldman said. An investor buying the S & P 500 10% below its high — regardless of whether it was the trough — would have gained a median return of 15% during the subsequent 12 months, the firm said. There have been 21 non-recession corrections during which the S & P 500 typically fell by 15%, Goldman said. A bear market sell-off calls for a 20% decline from a recent high. A decline of that magnitude today would place the S & P 500 at roughly 4,100, about 7% from Friday's close of 4,431.85.

Traders work on the floor of the New York Stock Exchange at the opening bell January 25, 2022.

Timothy A. Clary | AFP | Getty Images

And if history is any guide, corrections rarely turn into bear markets unless the economy is heading into a recession, according to the Wall Street firm.