With all the media talk of stock market corrections, I thought a reality check would be in order. Here are 7 facts about market corrections that you may not be aware of.
- Market corrections are more common than you realize.
Since the start of 1950, the S&P 500 has undergone 37 corrections of at least 10% or more and numerous more in the high single-digit percent range.1 That’s one correction less than every two years.
- We will never know what causes a correction until after the fact
World financial markets have become increasingly complex. There are far too many interdependent parts to determine ahead of time what exactly will cause the next correction or when it will occur. People tend to extrapolate what occurred in the past in a linear fashion and assume similar results moving forward. The problem is that we don’t live in a linear world and past occurrences often do not have the same result in the future.
- We don’t know when they will happen
I’m guessing that if you were to look at the business section of any newspaper on any day during the past 10 years there will be a prediction that a market correction is just around the corner.
- They tend to be short-lived
While no one likes seeing red in their investment portfolios, corrections tend to be short-lived. Of the previous 36 corrections in the S&P 500, 22 of them lasted 104 days or less (less than 4 months). Just seven lasted for more than a year and only two times since 1992 has a correction lasted more than 10 months.2
- They are usually driven by emotionally
Emotional investors and short-term traders tend to drive volatility, that’s why volatility is usually less during rising markets. When downside momentum picks up, emotions pick up with them adding to volatility.
- Short-term traders & speculators tend to be impacted the most
Long-term investors tend not to be hurt by corrections because they are not going to head to the sidelines when 10% or more drop happens. It is the emotionally driven short-term market watchers that tend to get hurt the most.3
- Long-term investing wins out
It is hardly new news that time is the friend of the investor. For each of the last 36 previous corrections in the S&P 500, all 36 were completely erased by a bull market rally.4 While there are no future guarantees, 36 out of 36 is not a bad batting average.