The US stock market (S&P 500) has declined 12% from its all-time high of 3,386 reached on February 19th (measured from its close of 2,978 on February 27th). A decline of 10% to 20% is referred to as a correction. This decline, attributed primarily to the likely negative economic impacts of the spread of the new coronavirus, comes in the context of the following:
- Year 2019, with a 28.9% gain (2,507 to 3,231), an all-time high, which reached 3,386 in mid-February 2019, as mentioned above;
- Year 2018, with a decline of 6.2%, (2,674 to 2,507), which was down as much as 12.1% (at 2,351) just before year-end;
- Year 2017, with a 19.4% gain (2,239 to 2,674);
- November 2016 post-Trump’s election, with a gain of 3.5% (2,163 to 2,239). From the start of Trump’s term to the current date, the gain is still 37.6% (2,163 to 2,978).
A February 27th CNBC article, “Here’s How Long Stock Market Corrections Last and How Bad They Can Get,” provides some additional longer-term historical context for declines:
“There have been 26 market corrections (not including today) since World War II with an average decline of 13.7%.
Recoveries have taken four months on average.
The most recent corrections occurred from September 2018 to December 2018. The S&P 500 bounced into and out of correction territory throughout the autumn of 2018.
This is the fastest 10% decline from an all-time high in the index’s history, according to Bespoke.
But there’s one possible big caveat. This is only if it does not fall into bear market territory, down 20% from a high. If the losses stretch to 20%, then there’s potentially more pain ahead and a longer recovery time.
There have been 12 bear markets since World War II with an average decline of 32.5% as measured on a close-to-close basis.
The most recent was October 2007 to March 2009, when the market dropped 57% and then took more than four years to recover. The S&P 500 closed in a bear market in December 2018 using intraday data.
Bear markets have lasted 14.5 months on average and have taken two years to recover on average.”
It’s also useful to remember that your asset allocation away from stocks reduces the impact of the declines. For example, a 50-50 allocation to stocks and bonds means that a 10% stock market decline has a 5% impact on your portfolio. The allocations are intended to allow you to get through sharp stock market declines and take a long-term view of your investments. Ron Lieber’s New York Times article, “Freaked Out by the Stock Market? Take a Deep Breath” (NYT 2/27/20, page B1), makes similar points about taking the long-term view, which we will discuss at more length in our next regular monthly Comments.
 Source: Franck, Thomas. “Here’s How Long Stock Market Corrections Last and How Bad They Can Get.” CNBC, 27 Feb. 2020, https://www.cnbc.com/2020/02/27/heres-how-long-stock-market-corrections-last-and-how-bad-they-can-get.html