FINANCIAL SENSE: CURRENT CORRECTION LOOKS SIMILAR TO THE LAST ONESubmitted by Raleigh, NC Financial Advisor | Golden Years Advisors on April 5th, 2018
In our January blog we cautioned investors that the market had been “too calm” for too long. And sure enough, by late January, market volatility returned strongly with daily + / - swings of several percentage points. We have now had two declines that we -10% declines from peak to trough. Naturally, many investors are concerned that this correction may worsen into an actual “bear” market (usually considered a decline of -20% from peak on a market index).
We try to help our client understand that corrections (a decline in a major market index like the S&P 500) are normal and should be expected on a regular basis. We often use the chart below from Clark Capital / Ned Davis Research to help illustrate this point:
Source: Clark Capital 2018 Market Outlook and Ned Davis Research.
Historically, “mini-corrections” (declines of -5% or more) occur almost every 108 days and corrections (declines of -10% or more) occur almost annually. We were lulled to sleep since the Presidential election in 2016 with 580+ days without even a “mini-correction”.
But our current correction looks like the last -10%+ correction that began back in August of 2015. Back then we quickly fell -10%+ and then recovered, fell -10%+ and then recovered, fell -10%+ and then recovered, before we finally fell -10%+ one last time and the market began its final recovery back to its old high. As Bob Carey, Chief Investment Officer at First Trust Advisors explains in the chart below, there often is a cycle of multiple decline / recovery moves in a market. More importantly, it usually takes 1 – 2 quarters for the sock market to get back to its former peak from its deepest trough. Here is Bob’s chart and his explanation of the pattern:
“View from the Observation Deck
1. A stock market correction occurs when a benchmark index, such as the S&P 500, sustains a price decline of 10% or more from the most recent peak. A bear market would entail a price decline of at least 20%.
2. Since World War II, the S&P 500 Index has experienced a correction, on average, about every 18 months, while the median time between corrections is just one year, according to S&P Capital IQ. So they happen fairly frequently.
3. The average time it takes the S&P 500 Index to fully recover its losses from a correction is four months, according to S&P Capital IQ.
4. As indicated in charts, both the current and previous corrections in the S&P 500 Index have involved initial 10% or more sell-offs followed by notable recovery attempts and then additional sell-offs.
5. In the previous correction, it took five months to fully recover the losses sustained in the correction, just a month longer than the four month historical average.”
Source: Bob Carey of First Trust Advisors, “Market Observations: The Current Market Correction Is Behaving Like The Last One”, April 3, 2018.
Past performance does not imply future results.