This has been a December to remember...in all the wrong ways for investors. On Monday, Dec. 17, the stock market slid to its lowest close in 14 months. The 122-year-old Dow Jones Industrial Average (^DJI 0.56%), broad-based S&P 500 (^GSPC 0.11%), and tech-heavy Nasdaq Composite (^IXIC +0.35%) all lost more than 2% of their values, with each index having dropped more than 10% from their all-time highs -- the true definition of a correction.
What's behind the biggest stock market correction in nearly three years?
What's causing this increase in volatility and added weight on the stock market? For starters, there's concern about what a trade war between the U.S. and China could do to the two largest economies in the world by GDP. Even with a 90-day tariff truce declared, there's little guarantee that a long-term trade deal will be worked out between the two sides.
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There have also been mounting worries about a flattening of the yield curve. The yield curve is a visual representation of the yield of Treasury bonds, based on maturity. Generally speaking, we'd like to see bonds with a short-term maturity have lower yields than bonds with longer maturities. This encourages banks to lend, since they borrow at short-term rates and lend at long-term rates, thereby pocketing the difference as net interest margin. As the yield curve flattens or inverts (i.e., short-term bonds begin yielding more than long-term notes), it discourages lending and can adversely impact the economy.
Even President Trump shoulders some of the blame for this decline. Trump's constant criticism of Federal Reserve Chair Jerome Powell, as well as the president's hard-line stance on getting funding for a border wall or shutting down the federal government come midnight this Friday, has raised the level of fear among investors.
Stock market correction? So what!
And yet, despite the market seemingly vacillating 1% to 2% per day, there are five stock market correction statistics that you need to know that will greatly calm your nerves.
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1. Corrections have occurred every 1.86 years, on average, since 1950
The first thing you should know is that even though corrections tend to catch Wall Street and investors off guard -- primarily because we never know in advance when they'll strike or what will cause them -- they're really common. Since 1950, there have been 37 separate corrections in the S&P 500 that resulted in at least a 10% decline from recent highs. Since we're less than two weeks from completing the 69th year since the beginning of 1950, we're talking about one correction every 1.86 years.
Now, understand that the stock market doesn't adhere to averages. You can't queue up your watch and approximate when the next correction will occur purely based on averages. We could go years without one -- there wasn't a single double-digit correction between 1990 and 1997 -- or face two corrections in the same year, as we have in 2018. The point being that occasional downside in the stock market should surprise no one.
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2. They last an average of 196 calendar days
Not counting the current correction, because we don't know exactly how long it'll last, the average length of the previous 36 corrections in the S&P 500 was 196 calendar days (less than seven months). That's not very long, all things considered.
In addition, 22 of these 36 corrections have taken place in 104 or fewer calendar days, with just seven totaling more than a year. Since 1982, just two corrections have extended beyond 288 calendar days: the dot-com bubble (929) and the Great Recession (517).
Why have corrections lessened in length in recent decades? While there are numerous extenuating factors, such as Fed involvement and fiscal stimulus, I'd argue that the ease of access to information has played a big role. The rise of the internet in the mid-1990s, and the ability for retail investors to access financial information immediately, likely reduced the role emotions and misinformation can play, thereby eliminating some of the wild swings in the stock market that occurred in the early and mid-20th century.
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3. There hasn't been a top-20 percentage move in nearly a decade
The Great Recession was unlike anything the stock market had seen in generations. The Dow Jones Industrial Average wound up shedding more than half of its value and logged three of the 13 worst percentage declines in history. At the same time, it also recorded three of the 20-largest percentage increases in history, with the most recent of all those swings coming on March 23, 2009 -- a gain of 6.84%. Even as the market has vacillated wildly in recent months, it hasn't even come close to breaking into the largest percentage moves (up or down) of all time.
What investors often overlook when analyzing a correction is that the stock market tends to increase in value over time. Whereas a 500-point move lower would have been devastating during the height of the Great Recession, a 500-point move today is nothing more than a 2% move up or down. Sure, that may be on the upper end of what we're used to for a daily move, but it's nothing more than a blip on the long-term chart for the Dow.
And, as icing on the cake, it's worth mentioning that many of the market's best days occur within two weeks of its worst days. That's why heading for the exit isn't advised.
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4. The S&P 500 has spent 7,104 calendar days in correction since 1950... and more than 18,000 in expansion
To further build on the second point, the S&P 500 has spent an aggregate of 7,104 days in correction since the beginning of 1950, based on data provided by Yardeni Research. Mind you, this does include the 64 calendar days of the current correction, so this figure could inch higher in the days, weeks, and months that lie ahead. That's more than 19 cumulative years in a downtrend since 1950.
But let's look at this from another angle. Sure, the S&P 500 has been trending lower for more than 7,100 calendar days since the midpoint of the 20th century, but it's also spent 18,084 calendar days (almost 50 years) in expansion mode. That's 2.55 bull market days for every day the S&P 500 spent in correction.
Not to mention, since the end of World War II in 1945, the U.S. economy has been in expansion mode in 86% of those months. We're currently in the midst of the second-longest economic expansion in U.S. history, dating all the way back to the 1860s. Pessimists may be right from time to time, but statistics suggest that the deck is very much stacked against them over the long haul.
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5. Long-term investors are batting 1.000
Arguably the most important statistic might be this: Long-term investors are batting 1.000!
As noted, there have been 36 corrections in the S&P 500 since the beginning of 1950, if we exclude our current correction. Of these moves lower, each and every one was completely erased and put into the rearview mirror by a bull market rally. And in many instances, it took just weeks or months to do so.
The matter of fact is that high-quality businesses tend to increase in value over time. This is why the stock market, even with these numerous hiccups, has returned an average of 7%, historically, inclusive of dividend reinvestment and when adjusted for inflation. The only variable needed is time. If you give your high-quality investments the proper time to blossom, there's a very good chance you'll outperform inflation and generate real money over the long run.
In other words, you have nothing to fear from a stock market correction if you have a long-term mind-set.
