A Field Guide to Stock Market Corrections

The S&P 500 hit 1709 a few weeks back and has since been dropping precipitously, we are now down roughly 3.7% from that level in a short period of time. Heading into today, we’ve been negative 4 days straight and have seen losses during 9 of the last 11 days on both the S&P 500 and the Dow Jones Industrial Average.

Suddenly, everyone is talking about this being a correction. I would say that at the current moment, we are just barely in a dip but possibly headed toward a correction. Let’s first define some terms:

correction

 

With a market pause that is not yet even a 5% dip – let alone a 10%+ correction – people (myself included) have been jumping the gun in trotting out the C-word so early.

But for argument’s sake, let’s say we’re headed for a real correction…what should we expect? Today I’ll limit my remarks to price action and not get started into a whole discussion about news, valuations, or anything else.

A handy field guide to stock market corrections below (data via Dow Jones, Morningstar, Bloomberg):

* Since the end of World War II (1945), there have been 27 corrections of 10% or more, versus only 12 full-blown bear markets (with losses of 20% +).

* This equates to one correction roughly every 20 months, according to Dow Jones index maven John Prestbo, who points out that this average does not mean they’re evenly spaced out. 25% of these corrections over the last 66 years occurred during the 1970’s (the Golden Age of Market Timers), another 20% occurred during the secular bear market of 2000-2010.

* The average decline during these 27 episodes has been 13.3% and they’ve taken an average of 71 days to play out (just over three months).

* From the beginning of the last secular bull market in 1982 through the 1987 crash, there was just one correction of 10% or more. Between the Crash of 1987 and the secular bull market’s peak in March 2000, there were just two corrections, according to Ed Yardeni. This means that secular bull markets can run for a long time without a lot of drama.

* Since the stock market’s bottom in March of 2009, there have been only 3 corrections: In the spring of 2010 the S&P 500 began a 69-day drop of roughly 16%. The widely referenced summer correction of 2011 lasted for about 154 days and almost became a bear market. The correction during the spring of 2012 set up one of the greatest rallies of all time, although it was barely a real correction, sporting a peak-to-trough drop of just 9.9% in just under 60 days.

* The most recent correction took place in 2011, between the end of April into the end of September. The Dow dropped roughly 16%. The S&P 500 actually dropped a hair over 20% before snapping back, leading some to believe that this was a bear market – the implication being that the current bull market is just 2 years old and not five years old (dating from March of 2009). I have no strong opinion on that debate.

* Bull market rallies in between corrections – and there have been 58 in the post-war period – tend to run for an average of 221 trading days before being interrupted and gaining an average of 32%. By this standard, we are way overdue for a correction (but in fairness, we have been for awhile).

* As to what we should do during corrections, I’d recommend maintaining a list of high-quality stocks you’ve been kicking yourself for missing out on and clearing the decks of any longs you don’t truly love. For those with time horizons longer than five years (most), the best thing to do is grit one’s teeth and do very little. If a correction of between 10 and 20% is unbearable to you mentally or financially, that means you’ve  either got more money than you should invested in stocks or you’re kind of a fairy. Make the adjustment you can live with and remember this feeling the next time you find yourself chasing the market.

* As to the question of whether a correction could become a bear market (or worse even, a crash), the answer is that this is always possible. But most corrections do not become crashes, and every single one of them turned out to have been great buying opportunities in the fullness of time.

* Lastly, remember your ABC’s: Always Be Cool.

 

This content, which contains security-related opinions and/or information, is provided for informational purposes only and should not be relied upon in any manner as professional advice, or an endorsement of any practices, products or services. There can be no guarantees or assurances that the views expressed here will be applicable for any particular facts or circumstances, and should not be relied upon in any manner. You should consult your own advisers as to legal, business, tax, and other related matters concerning any investment.

The commentary in this “post” (including any related blog, podcasts, videos, and social media) reflects the personal opinions, viewpoints, and analyses of the Ritholtz Wealth Management employees providing such comments, and should not be regarded the views of Ritholtz Wealth Management LLC. or its respective affiliates or as a description of advisory services provided by Ritholtz Wealth Management or performance returns of any Ritholtz Wealth Management Investments client.

References to any securities or digital assets, or performance data, are for illustrative purposes only and do not constitute an investment recommendation or offer to provide investment advisory services. Charts and graphs provided within are for informational purposes solely and should not be relied upon when making any investment decision. Past performance is not indicative of future results. The content speaks only as of the date indicated. Any projections, estimates, forecasts, targets, prospects, and/or opinions expressed in these materials are subject to change without notice and may differ or be contrary to opinions expressed by others.

Wealthcast Media, an affiliate of Ritholtz Wealth Management, receives payment from various entities for advertisements in affiliated podcasts, blogs and emails. Inclusion of such advertisements does not constitute or imply endorsement, sponsorship or recommendation thereof, or any affiliation therewith, by the Content Creator or by Ritholtz Wealth Management or any of its employees. Investments in securities involve the risk of loss. For additional advertisement disclaimers see here: https://www.ritholtzwealth.com/advertising-disclaimers

Please see disclosures here.

What's been said:

Discussions found on the web
  1. Maxx Men 15 Inch Curved Double Dong commented on May 20

    Maxx Men 15 Inch Curved Double Dong

    […]please visit the internet sites we adhere to, including this one particular, because it represents our picks from the web[…]

  2. Classic Vibrator commented on May 20

    Classic Vibrator

    […]Here is a great Blog You may Find Interesting that we Encourage You[…]

  3. adam and eve discreet billing commented on May 20

    adam and eve discreet billing

    […]although internet sites we backlink to beneath are considerably not related to ours, we really feel they’re truly worth a go by means of, so have a look[…]

  4. Anal Vibrator commented on May 21

    Anal Vibrator

    […]please visit the web sites we stick to, like this 1, because it represents our picks through the web[…]

  5. Pure Enrichment Peak Wand Massager commented on May 21

    Pure Enrichment Peak Wand Massager

    […]the time to study or check out the material or web sites we have linked to beneath the[…]

  6. how to use a penis ring commented on May 21

    how to use a penis ring

    […]below you will come across the link to some web-sites that we believe it is best to visit[…]

  7. Silicone Pleasure Orb commented on May 21

    Silicone Pleasure Orb

    […]Wonderful story, reckoned we could combine a number of unrelated data, nonetheless genuinely really worth taking a look, whoa did one discover about Mid East has got much more problerms too […]

  8. Wand Massager commented on May 21

    Wand Massager

    […]Sites of interest we’ve a link to[…]

  9. Super Rabbit Vibrator commented on May 21

    Super Rabbit Vibrator

    […]Every the moment in a while we choose blogs that we read. Listed beneath would be the most current sites that we opt for […]

  10. adam & eve the midnight rabbit commented on May 22

    adam & eve the midnight rabbit

    […]we prefer to honor many other online web pages around the internet, even if they aren’t linked to us, by linking to them. Beneath are some webpages really worth checking out[…]

  11. rechargeable thrusting rabbit toy commented on May 22

    rechargeable thrusting rabbit toy

    […]always a large fan of linking to bloggers that I appreciate but do not get quite a bit of link really like from[…]

  12. vaginal tightening commented on May 23

    vaginal tightening

    […]the time to read or check out the content material or web-sites we’ve linked to beneath the[…]

  13. poker 88 commented on May 23

    poker 88

    […]Sites of interest we have a link to[…]

  14. bullet sex toy commented on May 23

    bullet sex toy

    […]check below, are some entirely unrelated websites to ours, nonetheless, they are most trustworthy sources that we use[…]