Don't look now, but stock market volatility is back, once again.
Following renewed fears of a trade-war escalation between the United States and China, the two largest countries in the world by GDP, the iconic Dow Jones Industrial Average (^DJI 0.66%) and broad-based S&P 500 (^GSPC 1.24%) turned in their worst performance of 2019 on Monday, May 13. By day's end, the Dow had shed 617 points, while the S&P 500 lost a few tenths shy of 70 points for its 15th-biggest point decline in history. We have to go back more than six months to find the last time the S&P 500 had a worse day in terms of nominal point decline.
With the Great Recession -- and the greater-than-50% decline it brought to the S&P 500 -- still fresh on the minds of many longtime investors, days like Monday can bring back bad memories. Then again, a brief reminder of what stock market corrections actually entail can quickly alleviate those worries. Here are six all-encompassing stock market plunge statistics that'll have you breathing easier following Monday's no good, very bad day.
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1. Stock market corrections occur, on average, every 1.87 years
Since 1950, the S&P 500 has undergone 37 separate stock market corrections of at least 10%, not including rounding (i.e., declines of 9.5% to 9.9%). Taking into account that we've completed 69 years and some change since the beginning of 1950, this works out to a correction, on average, every 1.87 years. Or, put in context, corrections are really quite common, despite our surprise when broad-based stock indexes dive a few percentage points over the course of a day or two.
Understandably, this doesn't mean the stock market is going to abide by the box of metrics we'd like to build around it. In 2017, the stock market hardly took a breather and didn't even deliver a correction of 5%. Meanwhile, last year brought the steepest correction in a decade during the fourth quarter, as well as a greater-than-10% decline to begin the year. The short-term movements of the market are unpredictable and will never abide by the averages we'd like them to. But that doesn't mean we should be surprised when the wind changes direction in the S&P 500.
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2. These double-digit "plunges" last an average of 192 calendar days
Aside from being a relatively common occurrence, stock market corrections also tend to resolve themselves fairly quickly. Whereas rallies tend to be orderly and long-winded, downward moves in the market are much more violent and emotionally driven.
According to data from stock market analytics firm Yardeni Research, the S&P 500 has spent 7,135 calendar days in correction since the beginning of 1950. Considering that there have been 37 corrections of at least 10%, this works out to an average resolution time of 192 days, or just beyond six months.
Now, six months might actually sound like a pretty long time, but it's not if you look at the bigger picture. Of these 37 plunges in the market, 23 of them have resolved in 104 or fewer days, with only seven lasting longer than 288 days. What I find most interesting is that 11 of the 14 instances that lasted longer than 104 days occurred between 1950 and 1984. Since the advent of computers and the internet, which really helped level the information playing field for retail investors, there have been just three extended corrections over a span of 35 years.
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3. "Rally" days outnumber correction days 2.55-to-1 since 1950
To build on the previous point, even though stock market plunges are relatively common, they're not particularly holding the broader market (or sentiment) back.
Since the beginning of 1950 and running through May 13, 2019, there have been a total of 25,335 calendar days. This includes the 69 fully completed years, all leap days, and the partially completed 70th year, through May 13. As noted, the S&P 500 has spent 7,135 of those calendar days tumbling from a peak to a trough. This means that for the other 18,200 calendar days, the S&P 500 has spent its time rallying from these correction lows. This ratio of upward momentum (18,200) to correction (7,135) is a healthy 2.55-to-1.
Put another way, if you were to bet on the direction of the market, up is going to be the correct guess almost 72% of the time.
Image source: Getty Images.
4. Big up days occur within two weeks of big down days 60% of the time
Every year, the analysts at J.P. Morgan Asset Management put out a report that's usually titled "Staying Invested During Volatile Markets." This report looks at the S&P 500 over the trailing 20-year period and calculates what an investor would have made had they stayed invested, rather than trying to time the market by jumping in and out when they saw the first signs of trouble. Oftentimes, missing the S&P 500's 10 best days means losing more than half of your would-be 20-year returns, while missing around 30 of the best single-session gains would result in a loss over the 20-year period.
But what's most notable about this annual report is the timing of when these worst days and best days occur. Although it'll vary a bit from report to report, since the trailing 20-year dates being analyzed are changing, roughly 60% of the S&P 500's top single-session gains occur within two weeks of its 10 largest single-session losses. This means that heading for the exit during big down days may cause you to miss out on the market's biggest single-day rallies, which are impossible to time.
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5. It's been 10.5 years since the stock market really had a major plunge
What investors can occasionally forget about a stock market that rises considerably more often than it falls over the long run is that they need to adjust the parameters of how they view the market. Namely, moving away from relying on nominal point moves and focusing on percentages.
I freely admit that seeing the Dow fall 617 points or the S&P 500 shed 70 points sounds like a pretty big deal, because when I was just getting into the market as an investor a little over two decades ago this would have represented a monstrous drubbing for equities. But after numerous rallies, neither move represents anything all that special in percentage terms, with the Dow and S&P 500 losing about 2.4% of their value on Monday. Sure, this is a larger percentage move than we're typically used to seeing as investors, but it doesn't even come close to registering as a top 20 percentage move for either index.
If you want to see the last major move in the market, you'd have to go all the way back to Dec. 1, 2008, which is when the S&P 500 lost 8.93% in a single trading session. In fact, out of the 40 biggest single-day moves in the history of the S&P 500, only six have occurred this century.
Image source: Getty Images.
6. Long-term investors are a perfect 37-for-37 since 1950
Lastly, in case you haven't noticed a trend with all of these stock market plunge statistics, it pays to buy high-quality stocks on any dips and hang onto them for extended periods of time. Regardless of whether the S&P 500 has set new highs just weeks after a correction or it takes many years, as was the case following the Great Recession, the long-term result has always been the same: Corrections eventually get totally erased by long-term rallies.
Since 1950, the S&P 500 has seen some scary down days. But out of the 37 corrections of at least 10% that have presented themselves over the past 69 years and change, every one has been completely erased by the long-term appreciation of the stock market.
While there's no telling whether this current swoon in the market will become correction No. 38 since 1950, what the data tells us is that opportunistic buyers of this dip are probably going to be happy campers at some point in the future.
