Beginner’s Guide to Market Volatility

'Scary' but 'still normal': How to understand the most recent stock market drop

Twenty/20

The U.S. stock market has been plunging this week and is down more than 14% as of mid-Friday from last week's all-time high amid fears that the coronavirus will hamper global economic growth. Helping to stoke fears are worries that the coronavirus may be spreading closer to home, as the CDC confirmed on Wednesday the first U.S. case of unknown origin in Northern California.

At current levels, both the S&P 500 and the Dow Jones Industrial Average are in what's known as a correction, defined as a slump of at least 10% from a recent high. The last time these benchmarks endured declines of at least this amount was in late 2018, when they both tumbled nearly 20% before recovering.

The intensity and speed of the current sell-off have been notable: The decline happened over a span of just eight days. And even before the latest coronavirus news rattled markets, Wall Street was worried a correction was coming.

None of this necessarily means a bear market — defined as a slump of at least 20% from a recent high — is imminent, though. Here's what you need to know about the market's latest downturn.

'This is scary, but it's certainly still normal'

When stock prices plummet, it can be unnerving because no one can predict how severe or long-lasting the market decline will be. That's why people who have been investing for decades look to history for reasons to be optimistic.

Market declines of 5% to 10% are pretty common, happening about three times a year. Corrections of at least 10% "are a little more rare," happening less than once a year, on average, says Michael Antonelli, a market strategist at Baird. "This is scary, but it's certainly still normal."

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The inevitable question is, "When does it end?" The answer, though, is "highly unpredictable" because news about the coronavirus continues to worsen, Antonelli says. There have been more than 83,000 confirmed cases in this outbreak as the virus spreads across the globe, and at least 2,800 deaths.

Antonelli says he'll be looking for signs of a turning point from the stock market itself because it "represents the sentiment of all its participants." Such an indication is likely to come on a day when the S&P 500 opens lower and then ultimately closes higher. He points to this exact type of activity one day in late 2018, when the S&P 500 soared nearly 5% in one day, marking the end of that particular rout.

Since World War II, the average correction for the S&P 500 has lasted four months and it took another four months for the market to recover, according to analysis by CNBC and Goldman Sachs. On average, this benchmark tumbled 13% before its decline stopped.

In the past decade, investors endured only six corrections, and these declines have happened as quickly as a span of 13 days (in early 2018) to as slowly as 157 days (back in 2011), according to data compiled by Yardeni Research. The subsequent recoveries have taken anywhere from 70 to about 200 days.

Why you should embrace market bumpiness

The market's activity this week has interrupted what had been an unusually long period of tranquility. That's actually good for long-term investors, because it offers the opportunity to invest when prices are lower.

Of course, in the short term, that likely means the value of your portfolio has gone down. Because the market has always bounced back following significant dips like the current one, though, it's possible, and even recommended, to seize the opportunity and buy more when prices are lower.

You can take advantage of declines in two ways: by dollar-cost averaging and by lump-sum investing.

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Legendary investor Warren Buffett, who has been investing in the market for eight decades, has certainly seen worse, and he isn't worried. Earlier this week, he said investors should focus on the long-term merits of investing.

"I don't think there's any way to predict what the stock market will do 10 minutes from now, 10 days from now, or 10 months from now, so I work on what I think I'm able to do," Buffett said in a Feb. 24 interview with CNBC's Becky Quick on "Squawk Box." "We're buying businesses to own for 20 or 30 years ... and we think the 20- and 30-year outlook is not changed by coronavirus."

National Economic Council Director Larry Kudlow echoed this sentiment. "To me, if you are an investor out there and you have a long-term point of view, I would suggest very seriously taking a look at a stock market that is a lot cheaper than it was a week or two ago," Kudlow told CNBC on Tuesday.

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