Lessons from corrections and bear markets

05/17/22
  • S&P 500 ended last week more than 15% below its weekly closing high
  • Crossing that threshold has led to a bear market 85% of the time
  • Larger-than-average rallies sometimes followed downturns

When the S&P 500 (SPX) closed last Friday at 4,023.89, it was down 15.6% for the year—not the most significant milestone, perhaps, considering the index had traded within 21 points of bear-market territory a day earlier.1 But Friday, December 31 also happened to be the SPX’s highest-ever weekly closing price (4,766.18):

Chart 1: S&P 500 (SPX), 9/13/21–5/13/22 (weekly). S&P 500 (SPX) price chart. Closed more than 15% below record weekly close last Friday.

Source: Power E*TRADE. (For illustrative purposes. Not a recommendation.)


And whenever the SPX has ended a week 15% or more below a previous weekly close, it has fallen into a bear market (in terms of daily prices) all but two times over the past 65 years.

Whether the market “officially” crosses the bear threshold may already feel like a moot point, but looking at what the SPX has done after the other times it ended a week 15% below a previous weekly close provides some important perspective—namely, we get an idea of what traders and investors experienced when the market was in a similar position to the one it finds itself in now.

The following table summarizes 13 other downturns since 1957, showing (from left to right): the date of the weekly high closing price being referenced, how many weeks it took the index to close 15% below it, how many additional weeks (if any) it took for the move to reach its maximum loss, and the size of that maximum loss:

Chart 2: S&P 500 (SPX) 15%-or-larger declines (weekly closing basis), 1957–2021. Took market another 25 weeks, on average, to bottom.

Source (data): Standard & Poor’s. (For illustrative purposes. Not a recommendation.)


The big takeaways:

1. It took the SPX an average of 26 weeks to hit the -15% threshold. (This year it did it in 19 weeks—December 31, 2021 to last Friday.)
2. It took the SPX another 25 weeks, on average, to reach its eventual low.
3. The SPX’s average loss at that low was -30%.2

While this may not sound like cause for celebration, the individual results are important. In two cases (1988 and 2018) the SPX made longer-term lows the same week it crossed the -15% threshold, and in three others (1957, 1966, and 1976-77) it took the index 10 weeks or less to hit its eventual low, and its additional losses were fairly mild.3

Of course, at the other end of the spectrum are the extended bear markets of 1973-74, 2000–2003, and 2007-09. For example, it took the SPX another 84 weeks—more than a year and a half—to establish its eventual low after crossing the -15% threshold after its March 2000 high.

Although the most negative implication of this survey is that the current correction may not be over, another key takeaway is that these episodes all eventually ended, and the market ultimately pushed to new highs. Also, the initial phase of the upside reversal was often exceptionally strong. The following table shows the SPX’s percentage returns in the first 12 months after hitting its correction/bear-market lows:

Chart 3: SPX one-year returns off correction/bear-market lows, 1957–2021. Outsized gains.

Source (data): Standard & Poor’s. (For illustrative purposes. Not a recommendation.)


Again, there was a wide range of results, but the SPX’s average gain in its first 12 months after a hitting a correction/bear-market low was nearly 40%—around five times as big as the SPX’s average 12-month return since 1958.

The catch, of course, is that it’s impossible to know when a low will occur. But for long-term investors, especially, that’s not the point. The point is to remember that if you’re not in the market—if, for example, you got out on the way down—you won’t be able to participate in the growth phases that can sometimes follow corrections and bear markets.

Today’s numbers include (all times ET): Retail Sales (8:30 a.m.), Industrial Production and Capacity Utilization (9:15 a.m.), Business Inventories (10 a.m.), NAHB Housing Market Index (10 a.m.).

Today’s earnings include: Home Depot (HD), Walmart (WMT), Keysight Technologies (KEYS).

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1 “Bear market” traditionally refers to an index or individual stock trading 20% or more below its previous highest daily closing price.
2 Although the 1976-77 move never exceeded -19% in terms of weekly closing prices, it briefly passed the bear-market threshold in terms of daily prices.
3 All figures reflect S&P 500 (SPX) weekly and monthly closing prices, 1957–2022. (“One-year return” represents 52-week close-to-close move.) Supporting document available upon request.

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