By Dr. Brian Jacobsen, CFA, CFP®, Chief Portfolio Strategist at Wells Fargo Funds Management, LLC
"Happy families are all alike; every unhappy family is unhappy in its own way" (Leo Tolstoy's opening line in Anna Karenina). A similar thing can be said about correction: Every correction is unhappy in its own way. At least, that's the conclusion I draw from looking at the history of corrections of the S&P 500 Index based on daily data going back to December 30, 1949.
Now that major indexes have officially entered correction territory, investors are wondering how long corrections tend to last. Let's start with the worst-case scenario of a bear market. If a bear market is a move of 20% or more from peak-to-trough and a correction is a move of 10% to just under 20%, then the average bear market is a drop of 31.6% (median of 30.3%). I don't think this is the start of a bear, though. Most bears have been associated with actual economic downturns, and I don't think the economy is rolling over.
The average correction is a drop of 13.4% (median of 12.1%) and takes 108 days (median of 83) to move from the peak to the trough. The decline from the current peak has already extended beyond the median. If you take the peak of the current correction as being the May 21, 2015, high of $2,130.82 on the S&P 500 Index, then we are 95 days from the peak and into the correction zone.
What about the advance after the correction? The average gain is 47.0% (median of 32.4%). The average duration (from trough to next peak) is 495 days (median of 289 days). Advances are longer and more powerful than corrections. Maybe that can help inform how you should react during a correction: Sometimes doing nothing makes more sense than throwing in the towel.
Every correction is unique. Each has its unique trigger and pattern, but so far, to me, the current correction is following a pattern similar to the one traced out in 1953 or 2011. It doesn't look like the one in 1998, as that one was a much more abrupt move from the peak. The current move toward correction began in May with sideways movement until an abrupt move down in August.
In a way, I wish this correction looked more like 1998, as the recovery back to the previous peak was much more rapid than in the 1953 or 2011 experience. Keep in mind that even though the current correction is tracing a pattern similar to previous corrections doesn't mean it will have a future trajectory that matches any previous correction. In 1953, the market moved lower in anticipation of the recession of July 1953 to May 1954. In 2011, the market moved lower for a number of reasons: Greece's debt drama, bad monetary policy in the eurozone with the rate hike of April 2011, and the debt ceiling and budget battle in Washington, D.C.
Each correction is unhappy in its own way. The current correction, I think, will rebound more quickly than 2011's or 1953's when it's shown that growth is more robust than market prices are suggesting.
The views expressed are as of 8-26-15 and are those of Dr. Brian Jacobsen, CFA, CFP®, and Wells Fargo Funds Management, LLC. The information and statistics in this report have been obtained from sources we believe to be reliable but are not guaranteed by us to be accurate or complete. Any and all earnings, projections, and estimates assume certain conditions and industry developments, which are subject to change. The opinions stated are those of the authors and are not intended to be used as investment advice. The views and any forward-looking statements are subject to change at any time in response to changing circumstances in the market and are not intended to predict or guarantee the future performance of any individual security, market sector or the markets generally, or any mutual fund. Wells Fargo Funds Management, LLC, disclaims any obligation to publicly update or revise any views expressed or forward-looking statements.
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