Market Corrections Matter More Than You Think

During running bull markets, much commentary is written on why this time is different and why investors should not worry about market corrections. One such piece was written recently by Fisher Investments. To wit:

“After the S&P 500’s 26% return last year and this year’s strong start, many investors are worried – understandably – that this bull run is getting ahead of itself.

They shouldn’t. The strange-but-true fact is that, statistically speaking, average returns — which have amounted to about 10% a year over nearly a century of trading — aren’t normal in the stock market for any given year. A second, surprisingly pleasant fact is that so-called “extreme” returns are far closer to what we’d call normal — and they’re mostly on the positive side.”

There are a lot of problems with that statement, which we will get into. However, there are some essential facts about markets that should be understood. First, indeed, stocks rise more often than they fall. Historically speaking, the stock market increases about 73% of the time. The other 27% of the time, market corrections are reversing the excesses of the previous advance. The table below shows the dispersion of returns over time.

average returns

However, fairly substantial corrections have not been uncommon in those positive return years. As shown in the table below, intra-year corrections, which average roughly 10%, are common.