There aren’t many things in life that are certain, but stock market corrections are as certain as it gets. The only question is, from what level will the correction begin? This is always the tricky part of forecasting, and anyone who tells you that they can predict when the next market correction will start is either lying or delusional.
Below is a chart, courtesy of Doug Short at AdvisorPerspectives, which shows every correction of at least 5% since the market hit bottom in 2009. As you can see, most of them fall into the -5% to -10% range. In fact, the custom among market professionals is to ignore any downturn in the market unless it reaches -10% or more. This chart shows how frequently the market goes through these “mini-corrections” of less than 10%.
Why is it important to know how frequently the market goes through these price hiccups? Because many investors don’t handle them well. If you are sensitive to the ups and downs of the market, this chart might help you put things in a more normalized perspective. Swings are normal. They are a part of the deal you signed up for when you decided to invest in the first place. And swings of -5%, -10%, or even -15% shouldn’t cause you to run for the exits.
So what would a 5% declined mean if it were to begin tomorrow? The S & P 500 index closed at 2,073 today, so a 5% correction would mean that the index would drop by 103 points. I can guarantee you that the talking heads on t.v. would be all over that story. They would spin it as the beginning of the end, or at least the beginning of something really bad and scary. Don’t fall for it. Remember, the talking heads only have one goal in mind – attracting viewers so they can sell advertising. The scarier the story, the more clicks and eyeballs they attract.
I guarantee that we will have a drop of at least 103 points in the S & P 500 sometime in the near future. But as long as the economy is growing like it is today, my advice is…
Don’t Sweat The Small Stuff.