In this investor blog we will discuss the Short History of S&P 500 Declines of 10% or More
How Low Can The S&P Go?
The S&P 500 has experienced 95 corrections of 10% or more since 1928. The average correction has declined -27% from peak to trough although the median correction amount is only -16.4% meaning some notably deep corrections (including the Great Depression and ’08 Great Recession) skew the average declines downward. Corrections have lasted an average of 102 calendar days meaning the index has spent 29% of its last 90+ years in correction and 71% of its time rallying. Rallies also tend to last more than twice as long, running 240 calendar days, on average.
Forward year returns average 20% and are positive 78% of the time following S&P 500 declines of -10% or more. The worst decline, which troughed in June 1932 after falling 51%, was followed by the best forward year return, up 138%. Not surprisingly, buying at these troughs tends to produce above average returns – but that means one must time the bottom.
Forward year price gains average 7.3% and are positive 63% of the time once the S&P 500 passes the -10% or more decline threshold. This gain is below the 7.7% average and 69% frequency of positive price gains (i.e. excluding dividends) for all forward year observations.
Still, most corrections are just about done after declining 10%.Forward year price gains are positive less than half the time after the S&P 500 crosses the -15% decline threshold. There have been 42 -15% or more S&P 500 declines versus 95 declines of -10% or more. The average number of calendar days to trough after a -15% decline is 92 versus 49 days after a -10% decline. So even when the market has already fallen -15% it generally takes longer for the index to bottom than – 10% declines
The most likely month for a -10% or more decline to bottom is October. Of the S&P 500’s 95 declines of -10% or more, 22 of them have bottomed in October. Another 11 have troughed in March (remember Mar ’09?) so together October and March account for more than a third of the market’s troughs following -10% or greater declines.
Source: FactSet
Buying after the S&P 500 has crossed the -10% decline threshold leads to below average returns.
The most likely month for a -10% or more decline to bottom is October. Of the S&P 500’s 95 declines of – 10% or more, 22 of them have bottomed in October. Another 11 have troughed in March (remember Mar ’09?) so together October and March account for more than a third of the market’s troughs following -10% or greater declines.
Conclusion:
If you’re using mutual funds in your IRA or 401k, then you can’t control the risk.
A Buy-N-Hold strategy will not help when the market drops. Where’s the sell discipline?
What plans do you have in place if the market drops 40% like in 2008?
Good News:
CommonFinancialSense.com manages risk with an active approach to avoid large market losses.
We understand that it’s more important to avoid market losses than it is to achieve gains.
We manage portfolios based on your “personalized” risk tolerance, goals, and time horizon.
We manage several strategies that are constructed to maximize the client’s opportunity within a well-defined risk framework.
