The stock market is known for growing in value—not just during the recent bull market, but also, historically, over time. Sometimes, though, after climbing steadily, the market suddenly has a “correction.”
The technical definition is when a major index, such as the Dow Jones industrial average (which tracks 30 of the largest U.S. stocks) or the Standard & Poor’s 500-stock index, falls at least 10 percent below its recent high. For example, after a few bumpy days, both the Dow and S&P 500 dropped into correction territory on February 8, 2018, when they closed at 10.4 percent and 10.2 percent, respectively, lower than their late-January peak.
Has that ever happened before?
Absolutely. Any of several factors can trigger it—disappointing earnings reports from big companies, bad economic news from abroad, tumultuous political events—but corrections are a natural part of the market cycle. The last one was in January 2016, and there have been three others since 2010. Corrections have been known to occur every year or two, depending on how you slice the data.
Going back to 1928, Bespoke Investment Group calculates the average occurrence to be a little more than once a year, but sticking with post-WWII data bumps the average up to every 16 or 17 months. Yardeni Research puts the average at about every two years. A Deutsche Bank report expects one about every year and a half.
No matter what source or methodology you use, it seems clear that the most recent correction was just about due. You might even consider it fashionably late.
How long do corrections last?
Typically a few months or so, but it varies. According to Goldman Sachs, the average bull market correction drops 13 percent over the course of four months.
Looking at just the four previous corrections that have occured since 2010, losses ranged from 12 percent to 19 percent, and the longest one lasted 157 days. Since 1928, according to Bespoke, the median drop among 95 corrections was 16.4 percent over 64 days.
Then what happens?
It eventually gets better. The Goldman Sachs data shows that stocks recovered from their corrections after four months, on average, during bull markets.
Of course, with every correction, the question is whether stocks will continue to fall into a full-fledged bear market, defined as a 20-percent drop from the 52-week high. But even in those cases, remember: Throughout history, the market has always bounced back—usually with 18 months—and continued to grow over time.
While it’s impossible to predict what the market will do next, analysts don’t see this correction veering into bear market territory, in part because the U.S. economy is doing so well now. In fact, within a day of the February 8 correction, the market had already started to recover.
February 14, 2018