Yesterday was a brutal day for investors. Markets across the board were pummeled, with the S&P 500 seeing an over 10% drop during intraday trading (before recovering a bit in the latter part of the session). This led many to express fears we are entering a market correction at best, or at worst, a total market crash.
But just what do those terms mean, and what can the past tell us about similar market turmoil? Here’s what you need to know:
- What is a market correction? Traditionally, a market correction is defined as “a 10 percent drop in stocks from their most recent high,” according to The New York Times. The S&P 500 fit that definition yesterday for a period of time. It had fallen 10% from its January 3 high at one point.
- What is a market crash? A market crash, on the other hand, is a fall in the market that is over 20%, according to Fortune. This fall can happen in a single trading period. Crashes are considered worse than corrections, not only because of the steeper fall, but because they often signal the beginning of a recession and a bear market.
So what does yesterday’s correction (remember, it was greater than 10% but less than 20%) tell us about the future? Unfortunately, you can’t predict the future of the market based on a single day of trading, but there are some things to keep in mind.
First, based on a report from CNBC in 2020, there have been almost 30 market corrections since World War II. The average correction saw the markets decline by 13.7%. However, the corrections recovered, on average, about four months after they started, and sometimes much sooner. While history can’t be a guide to future market performance, the relatively short timescale of past market corrections may put your mind at ease.
Second, even if a market correction expands to a market crash and a bear market, data from First Trust Advisors (via Raymond James) shows, historically, bear markets are relatively short compared to bull markets. The average bull market lasts 8.9 years, but the average bear market only lasts 1.4 years.
So, is there any relief to investors’ anxiety in sight? Again, that’s a hard question to answer. But we may see more certainty in the markets after the Federal Reserve’s monetary policy meeting on Wednesday, in which the Fed is expected to announce its plans to raise interest rates.