We won’t sugarcoat it: It’s been a rough ride for stocks lately. After markets closed on December 31, the S&P 500-stock index was down about 14 percent from its all-time closing high on September 20 (but down about 6 percent from the start of the year). Every other financial headline can make it seem like winter is coming for the stock market—or, perhaps, is already here. So, it’s time for some perspective.
First off, it’s a fool’s game to pick arbitrary start and end dates to gauge relatively short-term market performance. Compare September 1, 2017, to September 1, 2018, for example, and you'd say the S&P 500 had a great year—up nearly 17.5 percent.
But more to the point, we’ve seen big drops before. Recently. This year!
The last time the S&P 500 fell by more than 10 percent was just 10 months ago. In market lingo, a 10-percent drop is an arbitrary but important milestone, generally described as a market "correction.”
How often do corrections happen?
Pretty often—36 times, in fact, since the end of World War II. You might recall the news last winter, when markets fell steadily in February, then swooned even lower in March. The correction didn't last, however, as spring and summer treated investors to a steady climb and a series of all-time highs. By September, the S&P 500 was up over 13 percent from late March.
Those results follow a pretty consistent pattern. An analysis by Goldman Sachs and CNBC found that the average market correction lasts four months, with stocks falling 13 percent—and it takes about four months to recover. (Although some corrections have lasted less than two weeks.)
Where do we go from here?
No one knows for sure—so we can’t tell you that the market will fully recover soon. Markets do sometimes sink lower and pass the 20-percent threshold (generally considered a “bear market.”) Although those happen less often. (The Goldman Sachs/CNBC analysis found that more than half of corrections have not ended in a bear market.) When they do, bear markets can result in an average drop of 30 percent, last 12 months and take two years to fully recover to initial levels on average.
But so far, recovery has come. Every time.
A few years may feel like a long time, but put it in perspective. Let’s look at a worst-case situation: Say you invested in an exchange-traded fund that tracked the S&P 500 index at the beginning of the Great Recession, on January 2, 2008. You wouldn’t fully recover your losses until 2012—but if you kept at it, and maintained that investment through December 28, 2018, you'd be up about 70 percent!
So, you’re saying I should just stay the course?
Yep. Trying to time the market just isn’t a good idea. There’s no reliable way to predict when the market will have a big recovery day, and sitting on the sidelines for those inevitable big jumps can cost you. One Charles Schwab analysis found that investors who missed the top 10 trading days during a recent 20-year stretch would’ve seen their returns fall by almost half, compared to those who stayed invested the whole time.
So, as we ring in 2019, it’s fair to lament 2018 as the calendar year when the annual S&P 500 winning streak came to an end—or, at least, a pause. But we should also celebrate the incredible, nine-year run of positive returns, which included annual gains of 15, 21, 26 and 32 percent—and take comfort in the knowledge that, based on 100 years of data, long-term investors are still poised to win over time. We’ll cheers to that.
This post was updated on December 31.