Is it time to panic?

Jacques de Villiers
January 30, 2019

Is it time to panic? Are the easy markets coming to an end?

The current bull market is fast reaching its ten-year marker, making it the longest bull market run in modern history. This can lead to nervousness among some people, especially those that believe in a financial theory called mean reversion, whereby markets re-establish their normal pattern of cyclical behaviour. In other words, the longer a trend persists, the more likely it is to end.

A Correction?

Everyone remembers the deep falls of 2008 and with stock prices not quite in the bear territory; we are looking at correction territory (a drop of between 10% and 19.99% in stock markets). On average, a correction occurs once a year and for over a hundred years, the market has seen close to one correction per year. Therefore, corrections are a normal phenomenon in financial markets.

The average correction has the following characteristics and attributes:

  1. it lasts 54 days long
  2. 5% market decline
  3. occurs every 357 days (or about once a year)

In 2018, the S&P 500 made a 10%+ correction from January to February and again in October when the S&P 500 ended approximately 10.2% down from its September 20th closing record high.

Looking back through history, we can see how long it takes a 10%-plus correction to reach new highs.

Below are some historical 10%+ corrections and the subsequent number of days it took for the S&P 500 to reach a new high.

  • April 2012 - 98 days
  • July 2007 - 58 days
  • January 2000 - 54 days
  • July 1999 - 85 days
  • October 1997 - 40 days
  • February 1997 - 52 days
  • May 1996 - 78 days
  • January 1990 - 102 days
  • August 1986 - 68 days
  • September 1967 - 147 days
  • June 1965 - 92 days
  • September 1955 - 35 days

In the summary below, we can see how long it takes historical 10%-plus corrections to achieve new highs:

  • 0 – 21 days: 0
  • 22 – 42 days: 11
  • 43 – 63 days: 1111
  • 64 – 84 days: 11
  • 85 -105 day: 111
  • 106 – 126 days: 0
  • More than 6 months: 1

A Bear Market?

In a span of 115 years, stretching from 1900 right up to 2015, the world has experienced 34 bear markets. This represents something more sinister than a correction, signalling a downturn in economic activity (usually leading to a recession) and a subsequent loss of investor confidence and capitulation in markets. Bear markets tend to be of shorter duration than bull markets - there tends to be a relatively slow build-up followed by an abrupt stop. Over this 115-year span, bear markets have varied in length from 45 days to 694 days, but on average, they last about a year.

The media maintains the mythical view that, if you are smart enough, you can predict the market’s moves and avoid its downfalls. In reality, no one can consistently predict an occurrence with high enough accuracy.  During the current nine-year bull market, there have been dozens of calls for stock market crashes from even very seasoned investors. None of these calls has come true, and if you had listened to the so-called experts, you would have missed the upside potential your portfolio would have on offer. We continue to believe the old adage that ‘time in the market beats timing the market’.

Data sourced from Market Oracle May 28th, 2018

Disclaimer: The views thoughts and opinions expressed within this article are those of the author and not those of any company within the Capital International Group (CIG) and as such are neither given nor endorsed by CIG. Information in this article does not constitute investment advice or an offer or an invitation by or on behalf of any company within the Capital International Group of companies to buy or sell any product or security.

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