The Bottom Line
- With the S&P 500 up 7.35% so far this year2, on top of already-substantial gains in the second half of 2016, some wonder if a stock market correction could be around the corner.
- Whether that proves true or not remains to be seen, but it’s hardly unusual for stock prices to experience periodic pullbacks.
- Over in the past 10 years there have been seven corrections and one significant bear market as shown in the chart above. Looking longer term, there have been 26 corrections and 12 bear markets in the 62 years since 1955.
- That means, on average, the S&P 500 experienced a correction about every 19 months. Of course, the time gap between corrections has varied significantly and is not a credible predictor of when another correction will come—but for what it’s worth, it’s been about 15 months since the last one ended.
- The average correction since 1955 resulted in a price drop just under 12% and lasted 57 days—with price declines ranging from 9% to 19.4% and longevity spanning from 13 to 147 days.
- The most recent correction resulted in a 13.3% drop over 70 days—from the close on November 3, 2015 through the close on February 11, 2016.
- When corrections do occur, market volatility tends to jump, which can be disconcerting—but panicking at such times is typically counterproductive.
- The most effective way to deal with corrections and volatility is not to shift in the teeth of them—but to have a highly diversified portfolio in place, which in today’s environment means a greater variety of asset classes and strategies than ever before.
- With active managers in your portfolio mix, corrections might even prove advantageous. Many active managers actually look forward to pullbacks and volatility because indiscriminate selling can create opportunities to make new acquisitions or add to existing holdings at attractive prices.
1 Source for all historical data is Bloomberg and Legg Mason. A correction is commonly defined as drop in price of 10% or more and a bear market as a drop of 20% or more. For our purposes, we have defined a correction as a drop in price of 9%+ and stick with the common bear market definition as a drop in price over 20%. We chose 9% instead of the “official” 10% to define a correction because in some cases intra-day trading could have easily resulted in a 10% drop that is not reflected in the closing price, which we use in the chart.
2 Source: Bloomberg, as of 5/3/2017.