Year to date, the S&P 500 (^GSPC +0.86%) and Nasdaq Composite (^IXIC +0.96%) have added 12% and 13%, respectively, despite uncertainty created by historically high bond yields, stubborn inflation, and the Iran war.
Unfortunately, navigating corrections, bear markets, and even market crashes is the price of admission for investors. They are a painful, but inevitable part of stock ownership. So, the next steep decline is coming sooner or later.
However, history says the smartest move investors can make when markets tumble is to buy the dip. Here are the statistics that back up that statement.
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The S&P 500: Median 12-month return of 17% following its first close in a bear market
The S&P 500 includes 500 of the largest U.S. companies that meet certain eligibility requirements, including profitability and a minimum market cap of $22.7 billion. The index is regarded as the best benchmark for the overall domestic market because it covers 80% of U.S. equities by market value.
Since 1985, the S&P 500 has suffered 19 corrections, five of which became bear markets. That means corrections have occurred about once every two years and bear markets about once every eight years. But the S&P 500 has always recouped its losses, and the rebound has typically been swift, as detailed below:
- Since 1985, following the S&P 500’s first close in correction territory (i.e., 10% below its bull market high), the index has returned a median of 16% over the next 12 months.
- Since 1985, following the S&P 500’s first close in bear market territory (i.e., 20% below its bull market high), the index has returned a median of 17% over the next 12 months.
Here’s the big picture: Every time the S&P 500 has entered stock market correction or bear market territory, investors have had a fantastic opportunity to buy stocks and index funds, especially funds that track the S&P 500.
Nasdaq Composite: Median 12-month return of 40% following its first close in bear market territory
The Nasdaq Composite includes more than 3,000 companies (most of which are domestic) listed on the Nasdaq Stock Exchange. The index is commonly viewed as a benchmark for growth stocks because it is heavily weighted toward the technology sector.
Since 1985, the Nasdaq Composite has suffered 32 corrections, eight of which became bear markets. That means corrections have occurred about once every 18 months and bear markets about once every five years. However, the Nasdaq has always recouped its losses, and the rebound has typically been swift, as detailed below:
- Since 1985, following the Nasdaq’s first close in correction territory (i.e., 10% below its bull market high), the index has returned a median of 24% over the next 12 months.
- Since 1985, following the Nasdaq’s first close in bear market territory (i.e., 20% below its bull market high), the index has returned a median of 40% over the next 12 months.
Here’s the big picture: Every time the Nasdaq Composite has entered market correction or bear market territory, it has created an excellent opportunity for investors to buy stocks or index funds, especially funds that track the Nasdaq.
As a final thought, the most dangerous decision investors can make when markets tumble is attempting to time a downturn. No one knows the future, so the most prudent course of action is to stay invested through highs and lows. Despite frequent corrections and bear markets, the S&P 500 and Nasdaq Composite gained 325% and 460%, respectively, during the last decade.
