A Historical Perspective – How Bad and how Long can Market Corrections be?

BILLION dollar question: are we entering a BEAR market or is October stock market dramatic decline just a CORRECTION like what we had back in late January this year?

First, the definition of a correction is when a major stock index such as the S&P 500 or Dow Jones Industrial Average suffer a 10% drop after closing at a recent high. All 4 major U.S. stock indexes: Down Jones, S&P 500, Nasdaq and Russell 2000 are now in the CORRECTION territory.


Dow Jones has suffered a 10.5% correction, measured from its 3rd October high and 29th October low.


S&P 500 has corrected 11.4% from its record high on 21st September till its 29th October low.


Nasdaq went through a 14.6% correction from its 1st October high till its 29th October low.


Russell 2000, which is an index for small-cap stocks, corrected 16.1% from its 31st August high to its 26th October low.

What is the average correction drop? Since World War II, the average drop for the S&P 500 in the last 22 corrections has been 13.8% and they normally lasted around 5 months. Based on this historical data, the recent October slide for S&P 5000 MAY have MORE pain to come. However, don't despair because based on the chart below, it seems that whenever S&P 500 has a RED October, there is a 70.3% chance that it would be GREEN in November based on past 27 instances since 1951.


6th November 2018 is the day for U.S. midterm election. Lets take a look how S&P 500 had fared from the October low close until the end of the year during previous midterm election years. The result is extremely POSITIVE because since World War II, S&P 500 has been higher 18 of the last 18 times - 100% hit rate! So based on this, we should not be too worried about the recent slide IF history were to repeat itself.

Then how bad were the biggest corrections? A BEAR market is defined when a major stock index collapse 20% or more, so technically a correction is a drop between 10% and 19.99%, there is always a chance we are only about halfway through this recent scare as seen in the 19% tumble in 2011, 1998 and the 1976-78 period. However, not every correction will turn into a more feared bear market. But IF a correction were to turn into a bear market, the average bear since 1929 has sliced nearly 40% off the S&P 500.

Timing is Everything! 时机就是一切!

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