Remember how boring the stock market had been? Stuck in a tight range with no trend in sight? In eight days the S&P 500 lost 11.1% and the boredom turned quickly to panic. Now that we’ve suffered some losses and found a tentative bottom, what happens next? The table below summarizes the last six corrections that exceeded 9%. It leaves out the bear markets of 2000-2002 and 2008. The table contains some good news and some bad news.
First the bad news:
1. Sometimes the initial downturn is not the end of the correction. So far, most of the recent loss was of the straight down variety. In the prior corrections, the average initial move down was 9.9% and lasted 12 days. However, the average total correction from the highs was 13.5%. That means we may have some more losses to come.
2. Of the six previous corrections, four retested their lows. In other words, once the actual low occurred, the market started up and then turned down again.
Now the good news:
1. In each of the prior corrections, new highs were reached in less than a year. On average, new highs were seen after 134 days.
2. One year after the low points in the past, the market was up from 14% to 51%. The average increase from the lows was 31.4% after one year.
I think the market is still pretty jittery. The VIX index, which measures the fear in the market, is still at a very elevated level. The Federal Reserve almost daily gives conflicting signals on when they will start raising interest rates. Until we have more certainty from the Fed and the status of China’s economy, we are still at risk for further downside. Once the final low has been seen, we should have a heck of a rally.