Dow Correction? We're Not Even Close Yet

Investors are talking about how a correction is imminent, but you have to put the recent declines in the proper perspective.

Jan 24, 2014 at 12:30PM

Although we don't believe in timing the market or panicking over daily movements, we do like to keep an eye on market changes -- just in case they're material to our investing thesis.

Stock markets are finally reminding investors about the risk side of the risk-reward equation, with the Dow Jones Industrials (DJINDICES:^DJI) responding to turbulent conditions among emerging-market economies by ignoring positive earnings news and plunging 186 points as of 12:30 p.m. EST. Predictably, a second straight day of triple-digit declines has some already trumpeting a "correction" in stocks. But before you declare the bull market over, it's important to realize that we haven't even come close to what most people used to consider a correction.

Source: Wikimedia Commons, Jean-Pierre Lavoie.

Even taking today's declines into account, the Dow is down just 3.4% from its record level set on New Year's Eve. The S&P 500 (SNPINDEX:^GSPC) has had an even smaller fall, to a level just 2.4% below the record it set just nine days ago. Nearly three-quarters of the Dow's 30 components are within 10% of their yearly highs, and fully half a dozen stocks in the blue-chip index are within 5% of their record highs --  Boeing (NYSE:BA), Visa (NYSE:V), Disney, Home Depot , United Technologies, and Johnson & Johnson. Moreover, in the context of Boeing's 91% gain in the past year, a mere 5% drop is hardly worthy of notice.

The reason why so many investors are near panic is that they're not used to seeing any choppiness in the markets. In terms of market volatility, 2013 was extremely unusual, with rock-bottom levels in the S&P Volatility Index (VOLATILITYINDICES:^VIX) lasting pretty much throughout the year. Even though the Dow has soared from below 7,000 less than five years ago to more than 16,000 today, investors still have the mindset that triple-digit daily moves are extraordinary. Last year, the Dow moved 1% or more in either direction just 23 times out of 250 sessions, and on only two occasions did 1% moves come back-to-back. Nor has this year been drastically different -- even if Dow drops more than 1% at the close today, it would still mark just the third 1% move for the average since Jan. 1 despite the perception of higher volatility in 2014.

As you assess your risk tolerance, it's important to stay aware of some simple facts:

  • Even for just a 5% correction -- something you'd expect to happen three times a year on average -- the Dow would still have to drop another 275 points from here.
  • A 10% correction -- which usually happens roughly annually -- would involve the Dow dropping 1,100 points from current levels.
  • If a true bear market hits -- usually defined as a 20% drop and occurring about once every three or four years -- then it would mean the Dow would have to fall about 2,750 points.

In short, if you think what we've seen so far in 2014 is a correction, then you don't remember what a real correction looks like. That doesn't mean you should panic, but it does mean you need to remind yourself of how markets typically behave before making decisions about how much risk you're willing to take on.

Don't panic
Yet even if a real correction is imminent, it doesn't mean you should bail out of stocks entirely. In our brand-new special report, "Your Essential Guide to Start Investing Today," The Motley Fool's personal finance experts show you why investing is so important and what you need to do to get started. Click here to get your copy today -- it's absolutely free.

Fool contributor Dan Caplinger has no position in any stocks mentioned. You can follow him on Twitter @DanCaplinger. The Motley Fool recommends Visa. The Motley Fool owns shares of Visa. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.

Compare Brokers