Since reaching a record high on Jan. 26, the S&P 500 Index (SPX) has taken investors on a bumpy ride, mostly to the downside. First there was a 10.2% correction lasting through Feb. 8. Since then, after various ups and downs, the index closed March 28 at 9.3% below that Jan. 26 high water mark. What next?
If recent history is a guide, stocks have a longer downward ride ahead. The average correction since 2009 has sent the index down by 14% to its trough, and almost 200 days elapsed before the previous high was regained, Bloomberg reports. While the recent decline in stock prices may be disconcerting to some investors, it is still not a bear market, which requires a drop of at least 20%.
'Very Stressful Stuff'
"This is very stressful stuff," said Michael Purves, chief global strategist at Weeden & Co., in remarks to Bloomberg. He continued, referring to the attitudes of investors who've gotten used to an almost uninterrupted climb in stock prices from Election Day 2016 to Jan. 26, 2018: "It's like going to the gym and lifting weights after you haven't been to the gym for two years. Part of it is just a very normal psychological, emotional reaction."
Julian Emanuel, chief equity and derivatives strategist at BTIG LLC, agrees. He told Bloomberg: "So much of the money was directed toward tech stocks, and there is a much greater emotional identification for investors in these household names. People are incrementally more agitated than they were during February's leg down because everyone believed the coast was clear. People are optimistic by nature, so when corrections hit, they are largely unexpected and emotionally jarring."
As Bloomberg defines it, a correction ends when the previous market peak has been regained. Using this methodology, just under 200 days was the average duration of the four corrections after 2009 but prior to 2018. Using this convention, the longest of these corrections lasted 417 days, from May 2015 to July 2016, per Bloomberg. Additionally, since the record high reached on Jan. 26 has yet to be regained, the market is still in a correction according to Bloomberg's definition, just 61 days old through March 28.
A more common way to look at the duration of corrections is just to measure the length of time to the trough from the previous peak. According to this methodology, those four previous post-2009 corrections lasted an average of 106 days, with the longest being 157 days in 2011, per Yardeni Research Inc. They also arrive at a slightly higher average decline of 15%. The correction earlier this year lasted only 13 days by this measurement standard.
The big unknown is whether the current downturn in stock prices has much more to go, and, if so, for how long. Strategists at Wells Fargo & Co. and JPMorgan Chase & Co. are among those who believe that the bull market still has some legs, and they are advising their clients to buy on the dips. (For more, see also: Why You Should Buy the Sell-Off.)
A widely followed set of indicators developed by Bank of America Merrill Lynch is increasingly pointing towards an upcoming bear market. However, as this forecasting tool stands right now, it suggests that a bear market is still about two years off into the future. Accordingly, strategists at that firm are advising clients to stay in equities for now, though perhaps at lower levels of exposure.
Meanwhile, a model used by Goldman Sachs Group Inc. indicates that a bear market already is underway. However, that firm's strategists believe that anomalies in the data are producing a spurious reading, and they advise investors to remain calm. (For more, see also: The Bear Market Isn't Here Yet.)
Bear Market Underway, or Not?
To be sure, while the 2018 correction is only halfway to a genuine bear market, technical analysts see evidence of a bear market that is fast approaching, if not already underway, in their charts. In fact, longtime market commentator Mark Hulbert is convinced that a bear market has begun. On the bright side, he cites history indicating that it takes, on average, just a little over three years from the onset of a bear market to a complete recouping of all losses.
The bulls are unfazed, pointing to strong fundamentals, as the economy and corporate earnings continue to grow. Also, they bank on the fact that true bear markets typically accompany recessions, and one is not yet on the horizon. (For more, see also: Why the Stock Market Is Poised for a Major Breakdown.)