A Stock Market Correction Is Underway By Brett Eversole
It's as inevitable as the sun rising in the morning and setting in the evening... And now, much to the dismay of investors, it's almost here. Stocks hit an all-time high three weeks ago. They've been falling ever since. And the declines have only intensified... We've seen a drop of more than 6% since last Wednesday. That means the overall fall is getting closer to correction territory. A correction is simply an overall drop of 10% or more. And nobody likes to go through one... Corrections are painful. They can cause you to worry about how bad things will get. But you need to understand one thing about market corrections: They're perfectly normal. Today, I'll explain why. And hopefully, you'll feel a little less stressed in the midst of a painful few weeks for stocks.
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Investor returns live on a continuum... Cash is on one side. With cash, you get low risk but zero return. It also loses purchasing power to inflation over time. On the other side of the continuum, you've got riskier assets like stocks. We know stocks lead to fantastic long-term returns. But they also move around a lot in the short term. So if you want those big, long-term returns, the market is going to punch you in the gut every now and then. And that's happening right now. Monday was a brutal day for stocks. The market opened down more than 3%. And the riskier the asset, the worse the decline. Bitcoin was down double digits at one point yesterday. Now, U.S. stocks are darn close to hitting the 10% decline that qualifies as a market correction. But let's put the recent pain into context... In the chart below, you'll see that stocks are nearing a 10% decline. But even with that fall, the S&P 500 Index is only at a three-month low. Take a look... It has been a stellar year for stocks. So even after this decline, we're sitting at the same levels we saw in early May. Of course, things could still get worse. But we're not seeing years of gains evaporate. This decline isn't nearly as bad as it seems at a glance. This kind of drop is also perfectly normal. In fact, it needs to get a bit worse to even count as "normal"... To see it, I looked at the worst intra-year declines for U.S. stocks since 1950... in other words, the worst peak-to-trough decline in each calendar year. Right now, U.S. stocks are down about 9% from their July high. Since 1950, the average intra-year decline was 14%. The median, which gives less weight to the extreme readings, was a fall of 11%. So it might feel bad right now. But history tells us the decline we're seeing is even a little shy of the expected range for a given year. You can see the data in more detail in the chart below. It shows where each year's maximum fall landed within each range – which gives us a sense of how often these declines occur. Take a look... You'll notice that we've almost never seen years with a decline of less than 5%. That has only happened seven times in 74 years. It's nearly as common to see a decline of 30% or more. Instead, almost all years fall into the range of a 5%-to-20% max decline. And the most common range is a fall of 10% to 20%. That means seeing an intra-year correction is more common than not. So again, these kinds of declines are normal in risk assets like stocks. Now, I understand this kind of pullback feels scary. Even normal market events can make folks feel uneasy. And the uncertainty of how bad things might get is hard to deal with too. A lot of investors see these kinds of falls and sell based on knee-jerk reactions... letting fear make their decisions for them. Please, don't make that mistake right now. It's more likely to see a correction than not in a given year. And this is what's crucial... Most corrections don't spiral into brutal bear markets. It might seem bleak right now. But risky assets lead to long-term returns because they can punch you in the gut every now and then. We're all taking that gut punch today. But don't expect a crash just yet. Good investing, Brett Eversole Further Reading "Economic data has been worse than expected in recent weeks," Brett writes. But that won't kill the current bull market. In fact, history shows similar scenarios have offered great contrarian opportunities... Read more here. Corrections are a natural part of the market. But it's smart to have a strategy in place to protect your wealth. That's why investors should wear a "financial seat belt" and put one investing tool to work... Learn more here. |
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