The headlines say it all:
- "Dow Plunges More Than 1,000 Points, Posting Its Worst Day in Two Years as Coronavirus Fears Spike" -- CNN
- "Coronavirus Fears Cause the Stock Market, Dow to Tumble" -- Vox
- "Dow Jones Crashes 1,000 Points but Warren Buffett Says Don't Panic" -- CCN
- "Wall Street Sinks as Pandemic Fears Rattle Investors" -- Reuters
When the curtain closed on Monday, Feb. 24, the iconic Dow Jones Industrial Average (^DJI 0.00%) had sunk by a 1,031 points, which marked its third-largest point-decline in its 123-year history. The broad-based S&P 500 (^GSPC 0.16%) and tech-heavy Nasdaq Composite fared no better, with point-based declines of 111 and 355, respectively.
As you probably gathered from the headlines, the primary reason for this apparent "plunge" in the Dow and broader market is the spread of COVID-19, the novel coronavirus that originated in Wuhan, within China's Hubei province. With new cases of the lung-focused illness cropping up in South Korea, Iran, and Italy over this past weekend, it's becoming likelier that a pandemic could be declared by the World Health Organization.
Why the sell-off, then? The thinking here is that not only is COVID-19 a major concern to the health and well-being of the citizens in affected countries, but it has the potential to substantially affect gross domestic product (GDP) growth in these countries. With China boasting the second highest GDP in the world, COVID-19 could send economic ripples throughout the world.
As evidenced by the 1,031-point decline on Monday, Wall Street is clearly concerned. But there are six far more impressive statistics you should be aware of that'll put the third-biggest point drop in the Dow's history into proper context.
1. Stock market corrections occur, on average, every 1.89 years
The first thing you'll want to understand is that, while a 1,031-point decline in the Dow might be a bit of a wake-up call, corrections in the stock market's major indexes are fairly common.
According to market analytics company Yardeni Research, the S&P 500 has undergone 37 corrections to the downside of at least 10% (not including rounding) since the beginning of 1950. That works out to one correction every 1.89 years. The point is that corrections are a natural part of the investing, and economic, cycle.
To add, make sure that you're looking past the headlines and the point values of these declines and focus on the actual percentages behind these numbers. Yes, a 3.56% decline in the Dow is a larger drop than we're used to seeing on a daily basis, but it still doesn't even come close to breaking into the top-20 worst days in the Dow's history. A 7% decline (about a 2,000-point drop) would be needed to call this a true "plunge."
2. The average stock market correction lasts only six months
Next, it's important to realize that when stock market corrections do occur, they more often than not aren't long-lasting.
Since the beginning 1950, Yardeni Research has shown that the S&P 500 has spent 7,135 calendar days (not to be confused with trading days) while in true correction status – i.e., a loss of 10% or more from a recent high. Having undergone 37 corrections, this works out to an average time from peak to trough of 192 days, or a touch over six months.
In fact, of the 37 stock market corrections the S&P 500 has undergone, 23 of them have lasted 104 or fewer calendar days, with only three corrections lasting longer than this length over the past 36 years.
3. Between 50% and 60% of the market's best days are within proximity of its worst days
In recent years, J.P. Morgan Asset Management has released an annual report that examines the 20-year rolling returns of the S&P 500 and highlights the importance of staying invested for the long haul, even during periods of heightened volatility. Although the trailing 20-year data changes with the release of each report, one consistency has been that between 50% and 60% of the S&P 500's best single-day performances, on a percentage basis, have occurred within a few weeks of its worst single-day performances over this more than 5,000-day trading period.
When broken down further, J.P. Morgan Asset Management finds that missing just the 10 best days over a 20-year stretch can more than halve your returns. Since no one can accurately predict what the market will do on a day-to-day basis, attempting to time the market could cost you dearly.
4. Disease-related corrections typically lead to 6% to 12% aggregate declines
Another figure you'll want to keep front-and-center is that the threat of a pandemic isn't new for the stock market, nor has it historically been much of a bother to equities. Taking into account scares such as Severe Acute Respiratory Syndrome (SARS), Middle East Respiratory Syndrome (MERS), the avian flu, and Ebola, the stock market declines associated with these serious illnesses ranged between 6% and 12%. We're already down 5.4% from the Dow's all-time intraday high.
Furthermore, these illness-related declines were registered within a matter of weeks to months. That's because downside moves in the stock market are often driven more by emotion than reason.
5. Optimists are a perfect 37 for 37 over the long run
If you want a reason to feel good about yesterday's "plunge," consider this: Over past 70 years there have been 37 corrections in the S&P 500, with each and every one of these corrections eventually being wiped out by a bull-market rally. In other words, if you're willing to buy high-quality businesses and give them the appropriate time to grow, there's an incredibly good chance that you'll come out a winner.
Put in another context, while investing offers no guarantees, 37 for 37 is about as close as you'll get to one.
6. Dividends stocks have nearly sextupled the returns of non-dividend-paying stocks
Last, but not least, you should realize just how incredible dividend stock returns have been over the long run. Between 1972 and 2012, public companies that initiated and grew their payout delivered annual average returns of 9.5%, according to a report from J.P. Morgan Asset Management. Meanwhile, non-dividend-paying peers averaged just 1.6% annual gains over the same 40-year time frame. That's a nearly 500% improvement for dividend stocks over non-dividend-paying stocks, in terms of average annual return.
Take telecom and content giant AT&T (T -0.66%) as the perfect example. AT&T currently pays out 5.4% per year -- that's three times the average yield of the S&P 500 – and has raised its payout for 36 consecutive years. The reason AT&T is able to do this is because of the predictability of its cash flow. Smartphones have somewhat become a basic-need good, and subscriptions to wireless plans make consumers less likely to cancel their service. When combined with AT&T's streaming and cable assets, it's clear that COVID-19 is going to have little impact on AT&T's ability to earn money and reward its shareholders.
In short, seeking out high-quality dividend stocks when the stock market corrects is pretty much never a bad idea.