Stock Market Corrections – Some Facts To Keep In Mind

What defines a stock market “correction” versus a “bear market” these days? Generally speaking, a downward correction is defined as a decline of 10% – 20%, and a drop of more than 20% indicates a bear market. Not everyone agrees, of course, and then there’s the question of which market index we’re talking about: S&P 500, Dow, Nasdaq, Russell, etc., etc.

As everyone reading this knows all too well, the US and most global equity markets have been in the tank so far this year. Yet as I wrote in my E-Letter on Tuesday, the Dow and the S&P 500 peaked in May of last year, and the Nasdaq topped out in July.

The markets declined from their all-time highs in May/July of last year, culminating in the massive selloff in late August. Following the rout in August, stocks rebounded somewhat in September and then retested the August lows late in the month.

When it looked as if the August lows would not be exceeded, the markets took off on a tear to the upside. As you can see in the chart above, the S&P 500 Index soared to nearly 2,120 by early November. Yet the Index failed to make a new high and each subsequent high was lower, painting a negative technical picture.

And we all know what’s happened so far this year. Since the record peaks last year, all three indexes are down close to 15%. So the question is: Are we in a correction or a new bear market? Obviously, I don’t have the answer. No one does.

Market corrections (-10% to -20%) are fairly common within bull market cycles. According to Deutsche Bank, the US stock market experiences a correction every 357 days on average, or about once a year. The average decline since 1980 has been -14.2%. That’s roughly where we are today.

Stock market corrections rarely last very long. According to MarketWatch, the average downward correction in the Dow Jones Industrial Average since 1945 lasted just under 72 trading days or about 14 trading weeks. If you agree that the current correction began in early November, then we’re at about 13 trading weeks.

To be sure, the knowledge that pullbacks are frequent and normal does not make enduring them any easier. Investors dislike losses more than twice as much as they enjoy gains, so seeing a drop in the value of their nestegg can be gut-wrenching.

Yet historically speaking, stock market corrections are a good time to buy high quality stocks and equity funds/ETFs at a bargain. The problem is, you never know if the correction is going to turn into a bear market.

Take today for example: It sure feels like this market could go a lot lower just ahead. As a result, most investors who are on the sidelines or are under-invested are afraid to pull the trigger right now. The point is, it always feels like this at the depths of a correction.

Here’s my advice, and I’ll keep it short. If you have $200,000 or more to invest, I strongly recommend that you look at our LEGACY CORE EQUITY PORTFOLIO right now. This strategy combines two of our most successful equity managers. One invests in carefully-selected “value” stocks; the other is a “sector-rotation” strategy based on momentum, which can move to cash in declining markets. Click on the link above for more information. As always, past performance is no guarantee of future results.

If you have less than $200,000 to invest, we have other professionally managed strategies and funds that can be accessed with as little as $50,000. Call us at 800-348-3601 for more information.

Remember, stock market corrections typically don’t last that long. Don’t procrastinate.