The current decline has put the S&P 500 index on pace to experience an unusually bad month. Through yesterday’s close, the large-cap index was down 10.6% on a month-to-date basis. This ranks as the 27th worst calendar month, according to @OddStats. It also makes this month the toughest since February 2009, when the S&P 500 fell 11.0%.
We may be closer to a bottom than many fear. While there are no guarantees, corrections (declines of between 10% and 20%) occur more frequently than bear markets (declines of more than 20%). As CFRA U.S. equity strategist Sam Stovall noted in the AAII Journal, there have been 21 corrections and 12 bear markets between December 1945 and July 2016. This past February’s correction brings the correction/bear ratio market to 22/12.
What if this isn’t a correction, but rather the early part of a bear market? History suggests we may have already crossed the halfway point in terms of declines. Four of the last seven bear markets have experienced peak-to-trough drops of 29.6% or less, according to data from First Trust.
Not only is it difficult to predict where the bottom is in advance, we won’t know that the market has bottomed until after the fact. This is why attempting to time the market and assuming you will know when to get back is so difficult. As we have previously shown, there is a big penalty for pulling out of stocks during bear markets and waiting until after the recovery is underway to get back in.
Those of you who are interested in learning more may find these previously published articles about other market downturns to be helpful:
- Bear Market Lessons: The Advantage of Micro-Caps (April 2002)
- Bear Market Grads: What You Should Learn From the Financial Crisis (July 2009)