Last Modified: Fri, Feb 09 2018. 12 52 PM IST

Don’t forget this bull hasn’t been correction-proof

Corrections matter, because they affect the psychology of investors, and how investors feel has a big impact on what stocks do

Stocks skidded into correction territory late on Thursday, down 10% from their recent highs after a 4% decline during the day. Photo: AFP
Stephen Gandel

New York: Stocks skidded into correction territory late on Thursday, down 10% from their recent highs after a 4% decline during the day, and the widespread reaction was astonishment about the rarity of such an occurrence, at least in the last decade.

Much has been written about how this is one of the longest and smoothest bull markets on record. Famously, and now perhaps dangerously, market volatility has been at all-time lows, at least until the past week.

But that, like much else when it comes to the market, is about perception and memory, which is famously short during bull markets but long during bear ones. In fact, this is the fifth correction since 2009, according to Yardeni Research, and as of right now the latest one is the smallest.

The S&P 500 Index dropped 19.4% in 2011 before recovering. The index was down 16% during a stretch the year before that, during the European debt crisis.

On top of that, there have been a number of close misses and plenty of dips. Remember the debt-ceiling crisis? The market fell 9.8% in late 2011 and 9.9% in the spring of the next year. Four other times since 2009, the S&P was down 5% or more before stopping short of an actual correction. But none of these, not the dips, or the near-misses, or the prior corrections turned into bear markets.

What’s more, of the 30 corrections that have happened in the market going back to 1959, just six have turned into full bear markets, meaning stocks fell 20% or more. That being said, corrections matter, because they affect the psychology of investors, and how investors feel has a big impact on what stocks do. They can also act as a release valve, repressurizing the system before it truly blows a gasket.

That’s not to say that this correction can’t turn into something worse. Stock drops are important because they can make investors take a hard look at U.S. and global economies to see whether something is out of whack. And at times, like during the financial crisis, and the Asian debt crisis, and to a lesser extent the European debt crisis, there was.

This time, the US and global economies look strong, and inflation and interest rates, while rising, are still comparatively low. Stocks are still relatively expensive compared with earnings. A correction can seem scary when the headlines flash, but just remember it’s happened before. The bull market has a way of lulling investors into amnesia. Bloomberg Gadfly

Topics: StocksWall StreetMarket correctionUS stocksDow Jones

First Published: Fri, Feb 09 2018. 12 52 PM IST

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