Markets and Economy

Stock market corrections and what investors should know

People’s reflections in a window as they walk past a stock market chart.
Key takeaways
Market corrections are common
1

Since the early 1980s, there’s been a greater than 5% drawdown in the S&P 500 Index in every year but two.

Is a recession imminent?
2

Recession isn't imminent, but market uncertainty can cause consumers and businesses to pull back on spending.

Recoveries have been quick
3

The average time to recovery is three months from a 5%-10% downturn and eight months from a 10%-20% correction.

Market corrections and larger drops are always unsettling. Investors lose sleep wondering when the stock market will level off and (hopefully) turn around. In the midst of the recent global market sell-off, I spent the wee hours reminding myself what I’ve absorbed about market corrections and volatility over the years. Here are some comforting thoughts for when market conditions keep you up at night.

Things to remember about market corrections and volatility

1. Market corrections happen almost every year.

Since the early 1980s, there’s been a greater than 5% drawdown in the S&P 500 Index in every year but two (1995 and 2017).1

2. Market volatility and corrections don’t come out of nowhere. 

Policy uncertainty tends to cause market volatility and corrections. In recent weeks, tariff talk led to larger-than-expected tariffs, which were followed by a relative reprieve and escalation for China. It's been a lot for markets to digest.

3. Market cycles don’t die of old age.

Their deaths are typically the result of policy mistakes. The longer the trade policy uncertainty lasts, the bigger the potential to sentiment and economic activity. Crises tend to end with appropriate policy responses. A recession is not imminent, but the risks are rising. (Explore our Portfolio Playbook to see what our indicators are telling us on a monthly basis.)

4. The corporate bond market has been the “canary in the coal mine.”

Corporate borrowing costs relative to the risk-free rate tend to provide an early warning sign, rising significantly ahead of a recession. Currently, the spread between high-quality corporate bonds and the risk-free rate are rising but remain below average.2 In short, I believe the corporate bond market is signaling a worsening economic backdrop, but not a recession.

5. The stock market has historically recovered quickly from corrections.

The average time to recovery from a 5%-10% downturn is three months. The average time to recovery from a 10%-20% correction is eight months.3

6. If a recession occurs, markets typically fall by more and take longer to recover.

The average decline during the more-mild recessions of 1957, 1960, 1980, 1981, and 1991 is nearly 20%. The stock market recovered, on average, within one to two years.4

7. The best days in the market often happen near the worst days of the market.

Investors likely know that returns can be significantly impaired if they miss the best days in the market, but they may not realize that the best and worst days tend to group together. In fact, of the 30 best days in the stock market in the past 30 years, 24 happened during the “tech wreck,” the Global Financial Crisis, and the COVID-19 pandemic.5 The market saw massive losses in response to tariffs and then massive gains a day later when tariffs were put on hold.

8. It’s typically been better to add to portfolios after severe down days.

Long-term investors have usually been better served by adding to portfolios rather than by withdrawing money during corrections.6

9. Time in the market has generally been better than timing the market.

On days when the headlines look dire, our action biases implore us to make changes to our portfolios. However, numerous studies, including one from Dalbar, concluded that investors who remained committed to their investment plans have typically fared better than those who have attempted to time the market.7

Footnotes

  • 1

    Source: Bloomberg, as of 8/2/24, based on the S&P 500 Index.

  • 2

    Source: Bloomberg, as of 8/5/24, based on the Bloomberg US Corporate Bond Index option-adjusted spread.

  • 3

    Source: Bloomberg, as of 8/5/24, based on the Dow Jones Industrial Average Index drawdowns and market cycles since 1945.

  • 4

    Source: Bloomberg, as of 7/31/24, based on the S&P 500 Index and recession dates defined by the National Bureau of Economic Research: Aug. 1957 – Apr. 1958, Apr. 1960 – Feb. 1961, Dec. 1969 – Nov. 1970, Nov. 1973 – Mar. 1975, Jan. 1980 – Jul. 1980, Jul. 1981 – Nov. 1982, Jul. 1990 – Mar. 1991, Mar. 2001 – Nov. 2001, Dec. 2007 – Jun. 2009 and Feb. 2020 – Apr. 2020. 

  • 5

    Sources: Bloomberg and Invesco, as of 8/5/24.

  • 6

    Source: Bloomberg, as of 7/31/24, based on S&P 500 Index returns since 1995. The analysis determines whether investors were better served by adding or withdrawing money following the 50 worst days in the market since 1995.

  • 7

    Sources: Dalbar, Bloomberg, as of 12/31/23. The study is based on a comparison of the return of the S&P 500 Index versus the average asset allocation investor return based on an analysis by DALBAR, Inc., which utilizes the net of aggregate mutual fund sales, redemptions, and exchanges each month as a measure of investor behavior.