Now, roughly four years into the current bull market and nearly a year and a half since the S&P 500 (SNPINDEX: ^GSPC) suffered a stumble of at least 10%, investors are understandably antsy. We’re overdue for an ordinary correction, and with lingering inflation still driving interest rates higher, it’s not wrong to worry that a small setback could start a full-blown bear market.
The possibility doesn’t necessarily mean you need to panic or even take immediate action. It does mean, however, you might want to start making a mental plan for this worst-case scenario, including cleaning up some of your … shall we say, more questionable and less-permanent holdings.
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Here’s some help on this front.
Statistics say down markets happen this often
You likely already know that a bear market is a pullback of at least 20% from a peak, separating one bull market from another. Mutual fund company Hartford reports that since 1929, a bear market materializes about once every three years, lasts a little less than a year, and shaves off an average of about 35% of the S&P 500’s pre-bear-market peak, versus a typical bull market’s gain of more than 100%.
Corrections of 10% or more, however, are far more common. Several occur during bull markets, in fact, without actually ending that bull market. Numbers from brokerage firm Charles Schwab indicate that since 1974, the S&P 500 has experienced 27 unique corrections, only six of which became bear markets.
That means every bull market goes through four to five corrections before it finally runs out of steam and suffers a true bear market, resetting the cycle. To this end, the current bull market’s only seen two corrections so far, with the last one taking shape in March of last year.
In other words, if you’re playing the statistical odds, you don’t have to fret too much about any setback that might be lurking around the corner (although it wouldn’t be wrong to mentally prepare for all possibilities).
Even so, every correction has a way of subtly — and sometimes not so subtly — reshaping the tone and timbre of the bull market it temporarily interrupts. That is to say, things aren’t quite the same as they were before a corrective move. The next correction isn’t likely to be an exception.
