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This Simple Chart Shows When to Expect the Next Stock Market Correction

- Money; Getty Images
Money; Getty Images

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.

- Money
Money

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.”

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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.”

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