It’s up, it’s down: markets have become increasingly difficult to navigate. The first few weeks of 2016 brought us into a technical market correction. Equity markets have since recovered with the S&P 500 Index ending the quarter in positive territory, but the ride was far from smooth.
Concerns about China’s prospects, oil price volatility and signs of weakness elsewhere, have weighed on global markets. Some countries, including Japan, have slipped into a bear market. While global factors naturally impact the health of our domestic market, there are many pieces to the puzzle and the outlook is far from clear. The following Q&A provides some perspective to help investors make sense of market volatility and make informed investment decisions.
What is a market correction?
A correction is a price decline of at least 10% in stocks, bonds, commodities, or indexes from a recent high. Corrections are often temporary events during a bull market, but can also indicate the start of a bear market or recession.
When was the last stock market correction?
Prior to 2016, the last correction was in August 2015, mainly fueled by fears of a slowdown in China. The one before that was four years earlier driven by a credit rating downgrade of the United States by Standard & Poor’s and fears of a deepening debt crisis in Europe. There have been 22 corrections in the U.S. markets between 1946 and 2015, with an average decline of 14%.
How often do corrections occur, and how long do they last?
Corrections are not uncommon and vary in frequency and length. There have been periods with more than one correction in a single year and periods of several years without a correction. On average though, corrections last about five months. Many investors and analysts look at corrections as a necessary ‘evil’ to cool off an overheated stock or bond market. Some also believe corrections return overpriced stocks closer to more realistic values.
How do bear markets compare with bull markets?
Based on past bear markets, the stock market has always recovered and upturns have been stronger and lasted longer than the downturns.
Does a correction necessarily lead to a recession?
Not according to history, which shows that while all recessions were preceded by corrections or bear markets, there were nearly three times the number of 10%+ market declines than there were recessions since 1948 (source: S&P Capital IQ). However, most, but not all, bear markets have been associated with recessions.
It’s important to keep in mind that markets never move in a straight line and that corrections and bear markets are a normal part of the market cycle. But so are bull markets, which tend to be more frequent and longer lasting.
If market volatility is a concern, it may be a good time to review your plan with your financial professional. Together you will reassess your risk tolerance, which may have changed, and review your asset allocation to make sure it’s still aligned with your long-term goals.
Visit our Navigating Market Volatility Center for more information.
S&P 500 TR USD Index—an unmanaged, weighted index of 500 U.S. stocks, providing a broad indicator of price movement.
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