This Simple Chart Shows When to Expect the Next Stock Market Correction
Money is not a client of any investment adviser featured on this page. The information provided on this page is for educational purposes only and is not intended as investment advice. Money does not offer advisory services.
The S&P 500 has nearly doubled in value since the current bull market in March 2020. What it hasn’t done in those nearly 19 months, however, is a selloff of at least 10% — or what’s known as a market correction.
In 29 of the past 50 years, the S&P 500 has experienced this type of market decline, and it just so happens that a correction of at least 10% has happened about once every 19 months, on average, going back to 1928. That means, in theory, that the market is due for a correction right about now.
And yet, the S&P 500 is less than 1% below its most-recent all-time high from September, and has bounced back from a slump of as much as 5.2% earlier in the month. That’s a pretty small pullback, especially when compared with the 14.2% average decline that has happened during the year since 1980, notes Jeff Buchbinder, equity strategist with LPL Financial. “You could say these are pretty common events.”
Investors who think a market correction is overdue might point to things like high stock prices, high inflation, slower economic growth, the lingering Covid-19 pandemic, the Federal Reserve’s plan to taper asset purchases, or even history as the likely cause. For Buchbinder and his colleagues at LPL Financial, there’s no reason to believe such a selloff is imminent. Rather, pullbacks are likely to be contained to a 5% to 8% range as investors quickly jump back in to buy stocks after any such decline, he says.
“Obviously nobody has a crystal ball, but we think we’ll get through the year without a 10% correction,” Buchbinder says. “To get a 10% correction, you need something bad to happen and it needs to be a surprise — and we don’t see what that surprise might be.”
Another year without a 10% correction?
If the S&P 500 does indeed finish off 2021 without enduring a 10% correction, then this year will be in decent company. The prior bull market, from 2009 to 2020, had five years with no declines of at least this magnitude — and the index ended all of those years higher.
Of course, things could change come 2022, Buchbinder notes. But for now, there’s another piece of history to take into consideration: A solid start to the year (with gains of at least 12.5% in the first three quarters) has typically boded well for the final quarter, with the S&P 500 rising another 3.9%, on average, during those final three months of the year, according to LPL figures.
Eventually, the stock market will face another 10% correction but it’s important to remember that these declines are normal. And last year’s bear market decline of nearly 34% should serve as a pretty relevant reminder that the market can bounce back quickly, even from a shock.
“Drawdowns are hard to avoid,” Buchbinder says. “Almost always, the best choice is to ride out those downturns.”
More from Money:
Robinhood for Beginners: A Complete Guide to Investing With the Controversial Stocks App