Corrections and Bear Markets - Facts and Observations
By Scott Revare
I ran into some very interesting facts regarding past market pullbacks that I thought would provide a good investing perspetive for our customers. Most of these facts were pointed out by Paul Lim in a recent NY Times article. First, we should define the two terms typically used when the market drops significantly - bear market and market correction. A bear market is defined as a drop in the overall market of 20% or more. (note: the overall market is usually measured by the S&P 500 - made up of 500 widely held US Company stocks). A market correction is a market drop of between 10% and 20%. Sometimes the industry fudges a little and starts talking correction once we hit a 7% or 8% drop, but the point is, that its a fairly significant drop from a market high. Here are a few facts for you on bear markets and corrections (brought to you by S&P):Bear Market Facts:
- Number of bear markets since 1928 (80 years): 23
- Number of bear markets since 1946 (62 years): 10
- Statistics for the last 10 bear markets:
- Average market drop: more than 33%
- Average number of days to drop that amount: 490 - (15 months)
- Average number of days for the market to recover back to the previous market high: 669 (22 months)
Market Corrections:
- Number of corrections since 1928: 87 - or more than 1 per year on average
- Number of corrections since 1946: 16 - or about 1 every 3 1/2 or 4 years
- Statistics for the last 16 corrections:
- Average market drop: 15%
- Average number of days to drop that amount: 148 - (less than 5 months)
- Average number of days for the market to recover back to the previous market high: 111 (less than 4 months)
In looking at these numbers, we can draw a few conclusions:
1. The market has recovered from all drops, but it recovers from corrections more rapidly than bear markets. Historically, the average time from the start of a correction to full recovery is typically less than 9 months. But recently, it seems that recoveries from corrections are even quicker. Paul Lim points out that there were three corrections in row in the late 90’s (97, 98, 99) in which the average recovery was only 51 days. Our two last “mini” (6-8%) corrections of late spring 2006 and in February of this year had recovery times of just 1-2 months.
If we put the market recovery times in the perspective of our retirement accounts, and think (average) worst case in a bear market situation - the average time from the start of a drop to market recovery is a little over 3 years. Which means that it pays for us to position our planning outlook to make sure we have 3 years to let our investments recover from a potential market drop. If you can’t afford to wait 3 years, your risk tolerance (and hence your Smart401k allocation) should be more conservative.
2. Market drops are more likely corrections than bear markets. Since 1946, official rcorrections (10-19% drops in the S&P 500) have outnumbered bear markets 16 to 10. When we factor in “mini” corrections(5-10%), that ratio is significantly higher.
3. Believe it or not, last quarter’s drop was not ever quite enough to be awarded the official label of “market correction.” Just using market closing values as the offical measure, the market has at most been down 9.4% (July-19th to August 15th). If we count intraday pricing, the difference has hit 12% - but that doesn’t count in the official measurement.
