What an absolutely wild past two weeks for the stock market. After roughly two years without so much as a hiccup, the sleeping giant known as volatility awoke, sending the iconic Dow Jones Industrial Average and broader-based S&P 500 (^GSPC -0.32%) down as much as 12% on an intraday basis from their all-time highs over just a few trading sessions. It also put both indexes into correction territory, which signifies a drop of at least 10% from a recent high.
There were multiple reasons suggested as to why stocks dove. First and foremost, there have been worries that the Federal Reserve could begin hiking lending rates at an even quicker pace. Initial estimates from the Atlanta Federal Reserve suggesting GDP growth could surpass 5% in the first quarter shook the markets, as it could mean a spike in inflation, and the need to get more aggressive with interest rates.
Image source: Getty Images.
A drop in bond prices, and a subsequent rise in yields (bond prices and yields move opposite of each other), has also spooked investors. Since bonds are viewed as a safer, less volatile investment, higher yields could entice investors to sell stocks, which are viewed as riskier, in favor of bonds.
Even computer selling has been blamed for the drop. With computers playing an increasingly large role in terms of total trading volume, steep selling may have triggered sell orders programmed by institutional investors, causing a cascade to the downside.
Here's why you should buy during every stock market correction
While there have been plenty of reasons for investors to worry of late, there's also one really good reason for investors to consider going on the offensive and buying more stock: It's historically the right move, 100% of the time.
Prior to our latest correction, and according to data from Yardeni Research, the S&P 500 had fallen by 10%, when rounded to the nearest whole number, 35 times since 1950. However, as we witnessed all of last year and throughout much of January, the broad-based index hit numerous all-time record highs. This means that every correction to the downside was eventually erased by a bull market rally. In many instances, these downside corrections were put in the rearview mirror within weeks or months of finding a bottom.
| Year(s) Occurred | Peak Closing Value | 10% Correction | Today, You'd Be Up... |
|---|---|---|---|
| 2018 | 2,872.87 | 2,585.58 | 2.7% |
| 2015-2016 | 2,109.79 | 1,898.81 | 39.9% |
| 2015 | 2,130.82 | 1,917.74 | 38.5% |
| 2011 | 1,363.61 | 1,227.25 | 116.4% |
| 2010 | 1,217.28 | 1,095.55 | 142.4% |
| 2007-2009 | 1,565.15 | 1,408.64 | 88.6% |
| 2002-2003 | 938.87 | 844.98 | 214.3% |
| 2000-2002 | 1,527.46 | 1,374.71 | 93.2% |
| 1999 | 1,418.78 | 1,276.90 | 108% |
| 1998 | 1,186.75 | 1,068.08 | 148.7% |
| 1997 | 983.12 | 884.81 | 200.2% |
| 1990 | 368.95 | 332.06 | 699.9% |
Data source: Yahoo! Finance, Yardeni Research. Table and calculations by author. Data accurate through Feb. 12, 2018.
Best of all, you don't even have to correctly guess where or when the correction will end in order to be proven right over the long run. Assuming you'd bought into the S&P 500 with the index 10% off its recent highs, the table above shows how you would have performed, through Feb. 12, 2018, in each of the past 12 stock market corrections to have fallen 10%, or more, not including rounding.
As you'll note, today you'd be up by a triple-digit percentage more often than not. And while you wouldn't have correctly guessed the bottom in any instance, you'd be up every time, which is reflective of high-quality stocks increasing in value over time.
Guessing is for the birds: When the stock market corrects, buy!
The best part about buying during a stock market correction, aside from knowing you have a very good chance of making money, is that it helps to remove emotion and doubt from the equation. These factors are what lead some investors to try to "time the market," or essentially dive in and out of stocks with the hope of missing big down days and being a part of large gains. Unfortunately, trying to time the market's biggest moves isn't something that can be done with any accuracy over the long run.
Image source: Getty Images.
Back in 2016, J.P. Morgan Asset Management released an analysis entitled "Staying Invested During Volatile Markets" that examined the interaction between the S&P 500's best and worst single-day performance between the beginning of 1995 and end of 2014. What the analysis discovered was that missing just 10 of the market's best days over a more than 5,000-day trading stretch could more than halve your returns. Missing a tad over 30 of the best trading days erased them completely.
By a similar token, the study also showed that a majority of the market's best single-day performances came within two weeks of its worst single-day performances.
All of this data clearly demonstrates that buying and holding high-quality stocks over long periods of time is the best strategy for wealth creation, which raises the question: What exactly are you worried about with this latest correction?
