The Nasdaq Composite (NASDAQINDEX: ^IXIC) and the S&P 500 index (SNPINDEX: ^GSPC) have both recently dipped into correction territory. The media made a very big deal of that fact, though the S&P 500 index quickly bounced back from its 10% decline the very next day. Still, investors’ emotions are running high amid increased market volatility.
Some important historical facts about the markets might help lessen their anxiety — and could even encourage them to jump back into the market.
If you’re going to invest in stocks over the long term, the one fact you have to come to grips with is that Wall Street is a fickle place. Stocks will go up; stocks will go down; and it won’t always be for obvious reasons. That’s true on an individual level and at a group level, from sectors to the market as a whole. It can be emotionally uncomfortable to own stocks.
But just because a stock goes up or down one day, week, month, or year doesn’t mean it won’t go the opposite direction the next day, month, week, or year. Humans often project current trends long into the future, even when that doesn’t make a lot of sense or have any basis in historical precedent. That’s why some historical analysis might help as the market flirts with correction territory, or a drop of 10%.
Indeed, 75% of the time, a correction does not turn into a bear market (a drop of 20%), according to data shared by the Carson Group. Going back to World War II, there have been 48 corrections, and only 12 of those corrections have gone on to become bear markets. That’s a pretty comforting statistic.
The problem, of course, is that there’s no way to know which of the corrections that happen will eventually turn into bear markets. This current downturn could very well end up being one of them (so much for being comforted by statistics). And there’s another, bigger fact to consider.
The chart above is a long-term look at the performance of a mutual fund that tracks the S&P 500 index. Notice that it heads higher and to the right, which is exactly what you want to see on a performance graph for an investment. But look closely, and you’ll notice there are drawdowns all along the way.
Some of those price declines were huge at the time, including the dot-com crash and the Great Recession. But now, they look like modest squiggles along the path. That path has historically been higher and to the right, with the market eventually gaining back all of what it lost and then moving on to new highs. It can take years for the process to play out, but so far, the market has gone on to rise again, no matter how emotionally stressful a downturn happens to be.
