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Ben Carlson: Just the Facts About Market Corrections

The title of this missive from Ben Carlson says it all:

“The S&P 500 is down nearly 7% from the all-time high it reached on the last day of April.

This correction has taken the year-to-date numbers from a gain of 18% and change to a gain of nearly 11%.

A gain of 18% felt pretty good four months into the year but double-digit gains through the end of May aren’t too shabby either.

But investors don’t care about the numbers they care about the trend. And the current trend is down.

I hate to be that guy but…get over it.

This is what happens in the stock market.

Since 1950, the S&P 500 has experienced an intra-year peak-to-trough pullback of 5% or worse in 65 out of 70 years. So roughly 93% of the time, a 5% correction has taken place from 1950-2019.

The only years that didn’t experience a peak-to-trough drawdown in excess of 5% were:

  • 1954 (-4.4%)
  • 1958 (-4.2%)
  • 1964 (-3.5%)
  • 1995 (-2.5%)
  • 2017 (-2.8%)

In this same time frame, almost 40% of the time stocks didn’t fall double digits and stayed in the 5-10% range. Another 38% of the time stocks fell 10-20% from the highs and 16% of the time losses were in excess of 20%.

Said another way, stocks have seen a double-digit correction in almost 55% of all calendar years since 1950.

So this correction could still have further to go.  Going into September 2018 the S&P 500 was up 10% and still managed to finish the year down almost 5%. These things can happen without warning.

But the stock market is also more resilient than most investors give it credit for.

Stocks have finished the year with a gain in 19 out of the 37 years since 1950 that the S&P 500 has seen a double-digit peak-to-trough sell-off during a calendar year. So a little more than half the time stocks were up even after a 10%+ correction in a given year.

I don’t know if this is a run-of-the-mill pullback or a scenario where it will turn into something worse.

There will always be a bull market in opinions when stocks fall but those opinions have no idea what will happen next, nor do the people who are spouting them.

I can say with certainty every time this happens it feels different. It feels like stocks falling a little is a precursor to stocks falling a lot.

But those feelings are worthless at times like these. Feelings get you into trouble because the markets don’t care about feelings or opinions.

The reasons are always different but market corrections are the price of admission to the wonderous theme park called the stock market.”

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