We haven’t had a drop in the stock market of 3% to 5%, in an abnormally long period of time. And we’ve never seen an environment quite like this one. Our advice to clients has been to play it cautiously, while at the same time teaching clients how to understand what they should do during a market correction.
A market correction is a decline of at least 10% of a stock, bond, or commodity market index from it’s highest point. Market corrections are generally temporary and typically end when the price of a stock or bond bottoms out and investors start buying again. However, sometimes people confuse corrections with actual bear market and often with drops of 20% of more. Although a market correction can be a precursor to a bear market or a recession, it is not always the case. To put this in perspective, 123 market corrections have occurred between 1900 and 2013, one per year on average. Whereas, bear markets have occurred only 32 times during the same period averaging one every 3.5 years. Despite a general perception that a market correction is bad, they actually can be healthy for a stock market. Market corrections provide the opportunity for the market to digest recent gains and for investors to gain a better understanding of how comfortable they are with market risk and/or to potentially add stocks to their portfolios at discounted prices. It is important to note that the stock market, while fairly volatile on a short-term basis, has a strong track record of long-term success. Since 1980, market corrections and the S&P 500 have averaged about 14%. However, looking at the overall picture each year, 27 of the last 36 years ended positive with an average return of 11.4%. As history has shown, those who chose to stay the course are rewarded for their patience more often than not.