Whether you realize it or not, investors have been privy to a special time in history. Coming off the worst recession this country had seen in 70 years, the U.S. economy is now in the midst of its longest economic expansion in recorded history, dating back to around 1860. This voracious expansion period, which has been fueled by record-low lending rates, has pushed the stock market to a nearly 11-year bull-market run.
Last week, however, investors learned all about the price of admission to the greatest wealth creator on the planet.
The stock market just turned in its worst week since October 2008
Spurred by the growing fear that coronavirus disease 2019 (officially known as COVID-19) will continue spreading globally and disrupt supply chains, the stock market turned in its worst week in more than 11 years. When the curtain closed, the 123-year-old Dow Jones Industrial Average (^DJI 0.16%) fared the worst, losing 12.4%. Interestingly, the more volatile tech-heavy Nasdaq Composite (^IXIC -0.28%) performed the best, comparatively speaking, and lost 10.5% last week. Meanwhile, the benchmark S&P 500 (^GSPC 0.03%) shed 11.5% of its value. We have to go back to the near collapse of the U.S. financial system in October 2008 to find a worse one-week performance, on a percentage basis.
Other records were set as well. The six trading sessions and eight calendar days it took for the S&P 500 to enter correction territory is the fastest on record, surpassing the mere 13-calendar-day, 10.2% slide the S&P 500 underwent in early 2018.
Furthermore, Thursday's (Feb. 27) declines in the Dow Jones, Nasdaq Composite, and S&P 500 of 1,191 points, 414 points, and 138 points, respectively, marked their biggest single-day point drops in history.
As you can imagine, such steep losses have investors on edge. According to data from Lipper, investors wound up pulling $18.5 billion out of stock mutual fund and exchange-traded funds in the week ended Wednesday, Feb. 26. That was the largest net-cash outflow registered since December, and I would not be surprised if it grew even larger following Thursday's record-setting tumble.
However, this data doesn't tell you the full story of what you should know as an investor. That's why I'm providing the following five figures to put this decline into the proper context.
1. An official correction occurs every 1.85 years
First of all, it's important for investors to realize just how common moves lower in the market actually are. While, yes, it's uncommon to see 11.5% in value erased from an index in a matter of one week, declines of at least 10% (not rounded) in the S&P 500 have occurred once every 1.85 years, on average, since the beginning of 1950. If including smaller corrections of say 5% or 8%, the frequency of these moves becomes even more pronounced. The point is, declines are part of the investing experience (i.e., the price of admission).
2. The average correction lasts 192 calendar days but has shortened in recent decades
Interestingly, though stock market corrections are commonplace, they generally don't last very long. The 37 previous corrections in the S&P 500 since the beginning of 1950 have lasted an average of 192 calendar days, or a little over six months. This includes 23 corrections that have moved from peak to trough in 104 or fewer calendar days (about 3.5 months). The swiftness of these moves lower can best be explained by emotions, rather than reason, driving the market.
What's also notable is that the average length of correction in the stock market has shrunk by about 24 calendar days since 1984. I attribute this to the rise of computers and the advent of the internet. Since Wall Street and Main Street have access to information at the click of a button, rumors can no longer drive extended downside moves as they once did.
3. The last five major disease scares led to short-term declines of between 5.8% and 12.9%
Since hitting its all-time closing high on Feb. 19, the benchmark S&P 500 has lost 12.8% of its value on COVID-19 fears. That might sound like a huge decline, but it's actually par for the course spanning the last five major disease outbreaks. According to data from Citi Research and FactSet Research Systems, the last five outbreaks -- SARS, Avian influenza, MERS, Ebola, and Zika -- all resulted in short-term declines of between 5.8% and 12.9% in the S&P 500, with the Zika scare lending to the steepest decline.
Additionally, these peak-to-trough declines happened considerably faster than the average correction since the beginning of 1950. The Ebola outbreak found its bottom in just 23 trading days (not to be confused with calendar days), while the Avian influenza in 2004 took the longest at 141 trading days. On average, disease outbreak corrections last 62.2 trading days, or just shy of three months.
4. You're 37-for-37 if you've bought any of the previous corrections
Want a feel-good statistic? Just in case you weren't already aware, if you buy high-quality companies during stock market corrections, you have an exceptionally high probability of making money, assuming you allow those investments the proper amount of time to flourish over the long run.
No matter how steep the correction is, every single move lower in the S&P 500 has eventually been erased and put in the rearview mirror by a bull-market rally. It's worth noting that, with the exception of the dot-com bubble and Great Recession, most corrections since 1984 have been completely erased within a matter of weeks or months.
In short, if you don't consider putting some money to work in the stock market right now, you'll almost certainly regret it later.
5. You're also batting 1.000 if you buy at the very peak, just before a correction
Finally, you should understand what little importance the timing of your stock purchase(s) holds as long as you intend to stay invested for long periods of time.
As an example, if you had bought an S&P 500 tracking index fund at the close on each of the past 37 peaks prior to a correction, you'd still be up on each and every one of your purchases, even after the worst week in more than 11 years for the stock market. This demonstrates how meaningless trying to time the market can be over many years, and that simply putting money to work regularly and allowing it to compound over time can be incredibly powerful.