Broker Check

How Long Do Market Corrections Take to Recover?

| October 11, 2018
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Stocks were down sharply for the second day in a row today - and I believe this is the 6th down day in a row.  The term "correction" is used if the market falls by 10% or more.  20% or more becomes a bear market.  I don't think we have reached the point of earning the label "correction" yet - but this has gotten people's attention, for sure.  

More seasoned investors tend to take these things in stride (oh yeah, the markets doing that crazy thing again...), but new investors can become particularly fearful.  Imagine you just invested a pile of cash in the markets, and your first investment experience is seeing the last week of ugly returns.  Your mind runs to questions like "how long will this go on?"  "how far down will it go?" and "how long will it take to earn all this back?"  Having heard that last question from a client today and answering (truthfully) that that question cannot be answered, I went digging for the answer.  

Now, the only question I can address here is how long the stock market took...in prior market events...to earn back its losses.  This does not address any individual portfolio.  An investor who is in a diversified portfolio will  probably a) lose less in the first place and therefore b) get back to breakeven even quicker.  But every situation and portfolio is unique, and every correction or recovery is unique as well.  

Here is what I found, courtesy of The Motley Fool website.  The below chart shows every market correction since 1950, along with the % of market value loss and the duration of the correction.  A few interesting points.   1)  When it comes to stock market performance, the tech bubble explosion of 2000-2003 was harder on investors than the Great Recession.  Almost as deep from top to bottom, but much longer lasting.  2) Note that most "run of the mill" corrections recover their loss rather quickly.  It is the deeper bear markets that  try investors patience.   3) Recovery from corrections is fast enough that many investors who hoped to "get out" of the market when things got tough never have a chance to get back in.  Here is a link to the remainder of the article, which offers more insight on this topic.  https://www.fool.com/investing/2018/04/11/how-long-do-stock-market-corrections-last.aspx      

A table showing all 36 corrections in the S&P 500 since 1950.

DATA SOURCE: YARDENI RESEARCH. TABLE BY AUTHOR. CORRECTION LENGTH LISTED IN CALENDAR DAYS. RED REPRESENTS CORRECTIONS LASTING LONGER THAN 365 DAYS, YELLOW BETWEEN 120 AND 365 DAYS, AND GREEN LESS THAN 120 DAYS

One problem we face in the markets now is there are a lot of investors who have not lived through significant downturns.  Corrections historically happen every year or so - but not so for the last 10 years.  And as I noted in the opening statement - it is the inexperienced investors who seem to have the worst time dealing with these things.  The prescription has worked through every one of these events.  Sit tight, turn off the news, wait it out, don't sell and lock in a loss.  That advice becomes easier to execute as you have experienced several of these downturns, but is very difficult to take for newbie investors.  Hang in there!   After all, this week doesn't even make it onto this chart yet.   

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