After the drubbing investors took in the 2008 bear market, it is understandable that they may become apprehensive when big declines hit the stock market. It may help to put the current market drop into some context. The slowdown that began in late August appears to be a market correction and not the start of an extended bear market. If that is the case, what can investors expect?
First, here are the standard definitions for bears and corrections:
Bear Market: A decline in the major stock market averages of at least 20 percent from their highs. Bear markets often take an average of 14 months to unfold and at least 25 months to recover back to their starting points. There have been just 12 bear markets since 1945.
Correction: A decline of anywhere from 5 percent to 20 percent in stock market averages from their highs. Smaller corrections usually take a month and then recover within two months. Larger corrections can take up to five months to occur and then four months or so until recovery. There have been 79 market corrections since 1945.
So far the low point for this correction was a decline of 13 percent from the peak of the Standard & Poor’s 500 Index in May to its trough on Aug. 25. The market began to recover in September but hit another setback when the Federal Reserve announced last week that it would not yet raise interest rates because the world economy was experiencing a slowdown.
If this is a correction, it probably still has some time to go. It is even possible that the S&P 500 will go back to its lows of late August or even surpass those lows before it begins to recover.
Investors should sit tight. Predicting the low is impossible, and predicting the recovery even harder. Given the precedent of market history, there is a decent chance that this correction will be history by late winter or even earlier.
Richard Schroeder, CFP®, Sept. 25, 2015