Stock Market Declines

Stock market declines produce fear and anxiety. Making matters worse, the news media often reports market declines in an overly dramatic fashion. For the long-term investor, it is vitally important that one doesn’t panic. Knowing how the market has behaved in the past can help investors keep their cool when everyone else is worked up in a frenzy.

In order to talk about the historical data, it’s important to define some terms. Market declines can be categorized based on their severity. These are arbitrary ranges and labels, but they will aid our analysis.

Using these terms, let’s look at all historical declines from 1928 – 2016 that are greater than 1.0%. We can glean some very useful information from this data.

The Bad News

  1. Declines happen all the time. On average, every 11 days or so, you should expect to see the stock market drop 1.0-2.5%.
  2. On average, you should expect to see the stock market go down 10-20% each and every year.
  3. Bear markets happen, on average, every 4 1/2 years.

The Good News

  1. Most declines (nearly 60%) are Routine Declines and never get worse than -2.5%.
  2. More than 99% of declines never cross the 20% bear market mark and recover in less than six months on average.
  3. Even declines in the 20-40% range have recovered, on average, in about two years.
  4. Extreme Bear Markets (> 50%), which have only happened every 30 years or so, have recovered in about 6 1/2 years, on average.