Market Downturns and Risk

Market Corrections and Bear Markets

Market corrections and bear markets are a normal part of investing. A market correction is a decline of more than 10% from market highs and a bear market occurs when the correction is greater than 20%. Corrections and bear markets can occur for individual securities or indices like the S&P 500. Since 1942, there have been 30 times the S&P 500 has declined between 10% and 20% and 12 declines over 20%. On average, markets have declined over 10% about every 2 years. But the average does not tell the whole story. In both 1990 and 2018, there were two market corrections in those years and between 1971 and 1980, nine out of the ten years included either a bear market or a market correction. After 1990, the next market correction was seven years later in 1997. This shows that market corrections and bear markets do not happen with any predictable pattern, and this is part of why market timing is impossible.

While market corrections and bear markets are not uncommon, it is important to remember that most of the time the stock markets are in a bull market. Chart 1 below shows both the Bear Markets and Bull Markets from May 1942 to December 2020. This chart shows that markets rise for much longer periods of time than market declines during bear markets and the percentage gains over a bull market are significantly greater than any losses from bear markets.

To read the rest of the Newsletter, click here.

Follow us on social media here.