For the first time in two years, worry has returned to the stock market -- at least for some investors. After a relatively straightforward climb without so much as a bump in the road in 2017, both the Dow Jones Industrial Average (DJINDICES:^DJI) and S&P 500 (SNPINDEX:^GSPC) have hit a rough patch in 2018. In fact, the nearly 122-year-old Dow Jones Industrial Average has logged four of its nine largest single-day point declines since Feb. 2.
On Friday, the Dow broke through its February low, closing at 23,533 -- more than 3,000 points below its all-time high -- while the S&P 500 tumbled to within a few points of its February closing low. Both indexes are down by more than 10%, pushing them officially into correction territory.
Why is the stock market falling?
With the unemployment rate at its lowest level since December 2000, and the U.S. economy on track to deliver solid year-on-year GDP growth, you're probably scratching your head and wondering why the stock market is heading lower. Though there is no single answer, it appears to be a confluence of factors.
For example, President Trump recently enacted tariffs on steel and aluminum that are designed to bolster domestic industries while lowering our trade deficit with China. Unfortunately, China may retaliate with tariffs of its own, escalating into an all-out trade war. Fears over slowing growth as a result of this trade war are spooking the market.
There have also been concerns that the U.S. economy could overheat. As of Feb. 1, following the release of ISM Manufacturing and construction spending data, the Atlanta Fed had forecast Q1 2018 GDP growth of 5.4%. If such an estimate rang true, it could entice the Federal Reserve to get more aggressive with its monetary tightening. And as we know, higher interest rates mean less lending and usually slower economic growth to follow. The Atlanta Fed's latest GDP estimate as of March 23 for Q1 2018 was down to 1.8%.
Even Facebook can be blamed. The social media giant's data scandal with Cambridge Analytica wiped off more than $60 billion in value last week. Since the S&P 500 is market cap-weighted, it was a prime factor in pushing the market lower.
50 years of corrections, and the one number that stands out
Despite these concerns, taking a step back and examining how the stock market has responded to corrections over the past five decades should help worried investors calm their nerves.
That table includes a rundown of every correction, rounded to the nearest whole number, since 1968 in the S&P 500, along with how long it took for that correction to find a bottom.
As you can see from the data, which comes from Yardeni Research, there have been 29 corrections over the past 50 years, working out to one around every two years, on average. But what stands out the most about this data is the duration of these corrections. There are six instances where a correction lasted longer than 500 days, as highlighted in red; two instances where they lasted between 157 and 288 days, as noted in yellow; and 21 instances where they've been 104 days or shorter, as shown in green.
While it's true that we can't predict with any long-term accuracy whether a correction will manifest into a full-fledged bear market that takes 500 or more days to find a bottom, the data pretty clearly shows that most corrections, over 70%, turn out to be nothing more than quick hiccups that last a few weeks or perhaps a little longer than three months.
Stock market corrections are a great time to buy
On the other hand, these hiccups usually turn into outstanding buying opportunities. With the exception of our current correction, all 28 previous corrections of at least 10% over the past 50 years have been completely erased by a bull market rally.
What's more, the S&P 500 has spent almost three times as many days over the past 50 years rallying compared to the days it's spent in correction. Though there are no guarantees in the stock market, buying an index fund, or a basket of high-quality stocks within a major index like the Dow or S&P 500, during a correction is about as close to a surefire long-term return as you're going to get.