The stock market giveth, and the stock market taketh away. Lately, however, there's been far more taking going on than giving, with both the Dow Jones Industrial Average (DJINDICES:^DJI) and S&P 500 (SNPINDEX:^GSPC) wallowing in their first correction -- i.e., a drop of at least 10% from a recent high -- since the beginning of 2016.
This correction hasn't been anything like what we've witnessed in recent years. Thus far, it's been the shortest correction in decades, with the Dow Jones initially screaming from its all-time high to down more than 10% in a matter of 13 calendar days (not to be confused with trading days where the market was open). While corrections of less than 100 days in length are quite common, 13 days is the shortest period from peak-to-trough in quite some time.
It's also unnerved some investors, who've witnessed record-breaking point declines in the nearly 122-year-old index. Over the past two months, the Dow has had single-session declines of 666 points, 724 points, 1,033 points, and 1,175 points -- the last representing the largest single-day decline in history. In fact, these represent four of the nine worst single-day point declines in the history of the Dow. With the greater than 50% decline in the indexes still fresh in some investors' minds from the Great Recession, worry is beginning to mount.
The crucial investing behavior you should change
But is this worry warranted? Probably not if you're willing to simply change a key behavior during this stock market correction: Stop looking at everything in terms of "point" moves and start focusing on underlying percentage declines.
You see, since hitting their troughs in 2009, both the Dow and S&P 500 had quadrupled in value as of January 2018. To be even less arbitrary, since hitting their pre-Great Recession highs in October 2007, the Dow and S&P 500 rose by a respective 88% and 84% when they hit their all-time highs in January 2018. Thus, even with both indexes having dropped by 10% since hitting record highs, long-term investors should still be up considerably from where they were a decade ago.
The mistake investors often run into is in focusing too much on nominal point moves and, for lack of a better phrase, freaking out anytime the Dow Jones drops by more than, say, 300 points. Back in 2009, a 300-point move lower in the Dow would have been a nearly 5% drop at its trough. However, after nine years of a bull market rally, a 300-point move in the Dow in either direction is nothing more than a pedestrian 1.2% or 1.3% move. While I don't have 122 years of Dow data in front of me, I'd be willing to bet that the Dow has seen more than 1,000 trading days over its existence where it moved up or down in excess of 1.2% or 1.3%.
Stop worrying about nominal point declines
Want more proof? According to a blogger on Seeking Alpha following the Dow's 666-point decline on Feb. 2, the 2.54% percentage move lower equated to just the 538th biggest percentage decline since 1900! Meanwhile, in the midst of the 1,175-point drop on Feb. 5, MarketWatch reported that the Dow's 3.33% decline when it was down 849 points intraday would have qualified it for just the 291st largest percentage move lower in history, according to FactSet data.
Want to know what a real decline looks like? Here's a snapshot of the Dow's top 20 single-day percentage gains and losses throughout its history:
What you'll note right away is that in percentage terms, we haven't seen true volatility in almost a decade. The last time the Dow registered a decline of greater than 7% in a single session was back on Dec. 1, 2008. Though we've witnessed what look like massive nominal point declines in the iconic index, they're actually rather benign when taken as a whole.
Plus, I'd be remiss if I didn't note that of the 36 corrections the broad-based S&P 500 has undergone since 1950 -- where it fell at least 10%, when rounded, from a recent high -- it's erased the entirety of that decline 35 times (all but the current correction) with an often extended bull market rally. Data from Yardeni Research clearly shows that most corrections tend to be short-lived, paving the way for a steady long-term climb.
In other words, stop focusing on nominal point moves and pay attention to the percentages.