Putting The 2018 Market Correction In Perspective

The S&P 500 is down 5 percent year-to-date and 15 percent from its all-time highs, crossing over into correction territory. These stock market dips can be scary for investors, but history shows market corrections are not only extremely common, they're typically relatively short-lived.

Historical Corrections

There have been 27 S&P 500 corrections of between 10 and 20 percent since the end of 1945, Guggenheim analysts wrote in a recent note. In other words, in the past 73 years, a correction similar to the one the market is currently undergoing has occurred roughly once every 2.6 years. These corrections have averaged four months in duration, which is good news considering the current correction started back in September.

But while it may seem as if the correction has set the bull market back significantly, Guggenheim found that the average time it has taken for the S&P 500 to recover to its previous highs for corrections of less than 20 percent is only about three months. If that pattern holds true in the current instance, the S&P 500 could be trading back at its September highs of 2,940 by April of 2019.

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Recent Corrections

The Guggenheim data goes all the way back to 1945, but Fidelity also took a look at the most recent market corrections to help investors keep things in perspective. Traders would have to have an extremely short memory to have forgotten the nine-day, 10.1 percent sell-off in the S&P 500 that started back on Jan. 26, less than a year ago. In that instance, it took the market 241 days to fully recover and make new highs in August.

Prior to the January 2018 correction, the last correction was a 14.1 percent market decline that started in May of 2015. It took the S&P 500 266 days to bottom out during the 2015 correction and another 151 days to recover.

Looking back even further, the S&P 500 experienced a 19.3 percent correction starting in April of 2011. The market bottomed after 157 days, but had fully recovered by the end of February 2012.

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Key Level

The key level for traders to be watching is around the 2,352 level.

If the S&P drops below 2,352, the correction turns into a technical bear market, which could trigger additional selling pressure and would likely be an indication that investors will need even more patience. According to Guggenheim, there have been eight S&P 500 declines of between 20 percent and 40 percent in the past 73 years. The average time it took the market to bottom out was 11 months, and the average time it took to get back to its previous highs was another 15 months.

After a wild ride in 2018, the SPDR S&P 500 ETF Trust SPY is down 2.8 percent and the SPDR Dow Jones Industrial Average ETF DIA is down 3 percent overall heading into the final two weeks of the year.

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