There’s no sugarcoating it: the investing community is enduring a challenging year.
As of the closing bell on May 18, the benchmark S&P 500 (^GSPC 0.01%) was off to its second-worst start to a year (through 95 trading days) in history — a decline of 17.7%. The widely followed Dow Jones Industrial Average (^DJI 0.00%) wasn’t doing much better, with a year-to-date drop of 13.3%. These double-digit declines mean both indexes are officially in correction territory.
It’s been an even tougher slog for the growth-stock-driven Nasdaq Composite (^IXIC 0.00%), which is down 27% on a year-to-date basis and 29% since hitting its all-time closing high in November. Considering its greater than 20% decline, the Nasdaq is firmly in the grips of a bear market.
During stock market corrections and bear markets, it’s not uncommon for volatility to pick up or for investors’ emotions and resolve to be challenged. I can tell you firsthand, I felt utterly dejected during my first bear market downturn as an investor a little more than two decades ago, during the dot-com bubble.
But after nearly a quarter of a century of putting my money to work on Wall Street, I’ve learned that the light at the end of the tunnel still shines bright, even during the market’s darkest days. What follows are five stock correction and bear market statistics I believe every investor needs to familiarize themselves with. These are the stats that’ll ease your mind, even during steep one-day sell-offs.
1. Double-digit corrections occur, on average, every 1.85 years
The first thing to understand about stock market corrections and bear markets is that they’re going to happen whether we want them to or not. Just as the Federal Reserve can’t prevent recessions from occurring, neither can investors keep the stock market bulls running indefinitely.
Since the beginning of 1950, the S&P 500 has had 39 separate declines of at least 10% from a recent high. That works out to a double-digit percentage correction once every 1.85 years. Even though Wall Street doesn’t adhere to averages, the correction that began earlier this year just happened to be right on time, relative to its historic average.
As you’ll see in upcoming points, corrections being inevitable isn’t a bad thing.
2. The typical correction only lasts about six months
One of the most important things to understand about double-digit percentage declines in the S&P 500 is that they’re often short-lived. While some of the one-day swings during corrections can be jaw-droppers, the uncertainty that causes corrections and bear markets tends to play out quickly.
Excluding the ongoing correction (because we aren’t certain how long it’ll last), 24 of the 38 double-digit declines in the S&P 500 since the start of 1950 found their bottom in 104 or fewer calendar days (about 3-1/2 months). Another seven of these corrections/bear markets hit their troughs between 157 calendar days and 288 calendar days (i.e., between five and 10 months).
Comparatively, only seven double-digit declines in the past 72 years — five of which were bear markets — have taken longer than a year to find their bottom.
When taken as a whole, the average correction/bear market since the start of 1950 has lasted 188.6 calendar days, or about six months.
3. Modern-era corrections are, on average, a full month shorter
But let’s dive a bit deeper into this correction data, because it’s changed noticeably over the past 35 years.
Beginning in the mid-1980s, Wall Street began going digital. As computers became commonplace on trading floors, the information gap between Wall Street and Main Street began to close. What I mean by this is that computers began democratizing the flow of information to John and Jane Q. Investor, thereby reducing the role rumors and/or a lack of information played in perpetuating market downturns.
Since the beginning of 1987, or what I’m arbitrarily referring to as the “modern era” for the stock market, there have been 17 double-digit percentage declines in the S&P 500. Only four of these 17 declines have lasted longer than 104 calendar days, including the ongoing correction, which currently sits at 135 calendar days (as of May 18). Of the previous 16 corrections, their average length was 155.4 calendar days, or roughly five months.
Put another way, improving the flow of information to Main Street has lopped a full month off the average correction over the past 35 years.
4. Bull market days outnumber days spent in correction by roughly 2.6-to-1
Here’s where things get really interesting.
Cumulatively, over 72-plus years, the broad-based S&P 500 has spent 7,303 calendar days (about 20 years) in some form of correction. The dot-com bubble (929 calendar days), oil embargo crisis of 1973-1974 (630 calendar days), early 1980’s inflation-based recession (622 calendar days), and Great Recession (517 calendar days), combine to account for 37% of all calendar days spent in recession over more than seven decades.
By comparison, 19,132 calendar days since the beginning of 1950 were spent in a bull/expanding market. No matter how many corrections or bear markets Wall Street and investors endure, history has conclusively shown that bull markets last disproportionately longer. In fact, every notable decline in the Dow Jones Industrial Average, Nasdaq Composite, and S&P 500 has eventually been erased by a bull market rally.
5. Holding an S&P 500 tracking index for 20 years has been a guaranteed moneymaker
Lastly, how long you hang onto your investments tends to be far… far… more important than at what price you buy.
According to data published annually by Crestmont Research, patience has paid off handsomely for investors over long time frames. Crestmont examined the rolling 20-year total returns (i.e., including dividends) of the S&P 500 for all 103 ending years between 1919 and 2021. For example, if you chose 1987 as your end year, the rolling 20-year total returns would account for 1968 through 1987.
What Crestmont’s research showed is that the S&P 500 has never had a negative 20-year rolling total return. In fact, there have only been two end years out of 103 (1948 and 1949) where the average annual total return over the 20-year period was less than 5%.
On the other end of the spectrum, more than 40 end years delivered average annual total returns ranging between 10.8% and 17.1%. The simple point being that patience and perseverance is often handsomely rewarded on Wall Street.
Although corrections and bear markets are inevitable, this, too, shall pass.