When the stock market starts tumbling — especially when it’s down more than 10% — many people hit their pain threshold and start to sell. They’re scared the slide could turn into a death spiral. Aren’t they just being sensible and prudent? Actually, not so much. It turns out that fewer than one in five corrections escalate to the point where they become a bear market.

To put it another way; 80% of stock-market corrections do not turn into bear markets. If you panic and perhaps move into cash during a correction, you may well be doing so right before the market rebounds. Once you understand that the vast majority of corrections aren’t that bad, it’s easier to keep calm and resist the temptation to hit the eject button at the first sign of turbulence.

On average, there has been a market correction every year since 1900.

When I first heard that statistic I was floored. Just think about it: if you’re 50 years old today and have a life expectancy of 85, you can expect to live through another 35 corrections. To put it another way, you’ll experience the same number of corrections as birthdays. (Note: a correction is defined as a drop of at least 10% but not more than 20%. A bear market is a drop of more than 20%).

Why does this matter? Because it shows us that these corrections are just a routine part of owning stocks. Instead of living in fear of corrections, accept them as regular occurrences. Historically, the average correction has sent the market down 13.5% and lasted 54 days — less than two months.

Still, in the midst of a correction you might find yourself becoming emotional and wanting to sell because you’re anxious to avert the possibility of more pain. You’re certainly not alone. These widespread emotions create a crisis mentality. But in all but a few cases — the vast majority of the time — the sky was not falling. It was simply a “seasonal storm.”

As Neil Irwin writes in the New York Times: (https://www.nytimes.com/2018/02/07/upshot/the-stock-market-is-worried-about-inflation-should-it-be.html)

“To the degree the recent wild swings in the stock market are rooted in economic fundamentals, these are the fundamentals to fear: that the already strong economy may overheat, inflation may spike, and the Federal Reserve may then raise interest rates more aggressively to try to combat that higher inflation.”

“The kernel of evidence that supported those fears was a report Friday that average hourly earnings for American workers rose 2.9 percent over the 12 months ended in January, the highest since the economic expansion began nine years ago.”

Let me share this with you. I admit that down markets are no walk in the park.  Honestly, I feel miserable too. My stomach knots up. And I sometimes need to get out a couple of my books on ‘staying the course’ and reread them!

Here’s a chart from our good friends at First Trust. It’s called Staying the Course. It provides a useful perspective so I think it’s worth a look.

Market Minute – The Market IS the News!

When the stock market becomes the lead story on the nightly news as it has done this week, that can mean: a) something unusual and worthy of our notice has actually occurred, b) they would like us to take our focus off of something else, c) there is a spot of genuine discomfort to be exaggerated where possible or d) all of the above. The correct answer is d.

My personal opinion of the ‘financial media’ is low, but there are times when even I am astounded at their propensity to put more emphasis on drama than an illumination of the facts.

The headline declaring ‘The Biggest One-Day Drop in History’ was technically true, but the stories that follow the headlines could and should be more forthright in their characterizations. (But of course, we know the media is in the business of selling headlines and improving ratings, not in the business of providing sound investment advice.) 

While the Monday drop of 1,175 points was indeed the biggest POINT drop in history of the Dow Index *, that translated to a 4.6% decline, which is nowhere near the biggest single-day decline on a percentage basis. That title still goes to another Monday, ‘Black Monday’ when the Dow tumbled over 22% on October 19,1987. So, although Monday’s move was significant, in terms of percentage decline in the Dow on one day, Monday’s drop is #100, significantly less than the 1987 drop. It doesn’t even come close to being near the top 10! 

By the way, the market return for 1987 was positive – unless of course an investor sold on that black Monday. For those who bought on later in the day, it was a good year. Indeed, it was a very good year.

Ronald P. Denk, CFP®
Investment Advisor
Denk Strategic Wealth Partners
10000 N. 31st Avenue, Suite C-262
Phoenix, AZ 85051
Phone (602) 252-8700
Fax (602) 252-8701
Toll-Free (877) The-Denk

This weekly article reflects news, commentary, opinions, viewpoints, analyses and other information developed by Denk Strategic Wealth Partners and/or select but unaffiliated third parties. DSWP provides Market Information for illustrative and informational purposes only. If you wish to receive this weekly commentary by email please contact us at 602-252-8700 or by e-mail at lindaw(at)denkinvest.com. If you are receiving this commentary via email and would prefer not to please let us know either by email or phone.

Ronald Denk is an Advisory Representative offering services through Denk Strategic Wealth Partners, A Registered Investment Advisor. He is also a Registered Representative, offering investments through Lincoln Financial Securities Corporation, Member FINRA/SIPC.

Denk Strategic Wealth Partners is not affiliated with Lincoln Financial Securities Corporation. Information in this commentary is the sole opinion of Denk Strategic Wealth Partners. Past performance is no guarantee of future returns. All market related investments involve various types of risk, which include but are not restricted to, credit risk, interest rate risk, volatility, going concern risk, and market risk.

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*The indices are representative of domestic markets and include the average performance of groups of widely held common stocks. Individuals cannot invest directly in any index and unlike investments, indices do not incur management fees, charges, or expenses, therefore specific index returns will be higher. Past performance is not indicative of future results.