Perhaps the biggest question on Wall Street right now is whether the recent pain in the U.S. stock market is over. If history is any indication, the answer is no.
Both the Dow Jones Industrial Average DJIA, +1.38% and the S&P 500 SPX, +1.49% entered correction territory on Thursday, defined as a 10% drop from a recent peak—in this case, record highs that were hit in late January. According to Bespoke Investment Group, which analyzed the 95 corrections the S&P has seen since 1928, investors might want to brace themselves for more pain.
Per Bespoke’s data, the median decline for the S&P in a correction is 16.4%, and the median length of a pullback is 64 days. Were the S&P to hit that median in the current selloff, it would bottom around 2,400, or roughly 7.8% below current levels.
“Keep in mind, though, that these are median levels. There have been a number of corrections (13) that saw declines of less than 11%, while several saw deeper declines of more than 20%,” the research group wrote in a blog post. A decline of 20% would put the index into bear-market territory, where nearly one-fifth of S&P components currently trade. “In terms of length, prior corrections have also been all over the map. Some have lasted as little as three days, while others have stretched on for well over a year.”
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Even with the recent losses, stocks have shown a pronounced upward bias over the past several months. The Dow is up nearly 20% over the past 12 months, while the S&P is up 13.4% over the same period, and the Nasdaq COMP, +1.44% , boosted by the outperformance of large-capitalization internet and technology names, is up 20.5%.
This correction marks Wall Street’s first 10% pullback since early 2016, and, according to financial blog SentimenTrader, Thursday’s drop marked the Dow’s fourth fastest decline into correction territory from an all-time high, based on data that go back to 1897.
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The speed of the drawdown points to how stocks, prior to the correction, had largely been bereft of retreats or much volatility in either direction. The S&P recently ended an unprecedented streak without a pullback of 5%, something that is historically quite common.
Corrections are also quite common, occurring about once every 11 months, on average, although that statistic is skewed historically by their heavy distribution near the Great Depression. That Wall Street went about twice that length without one has some analysts pointing out that the long absence of a correction—rather than the appearance of the current one—was the real historical anomaly.
“If we look just at the post-WWII period, there have been 55 corrections in the span of 73 years, reducing their frequency to once about every 16-17 months. In any event, the market was still overdue for a correction heading into the current one, but maybe not by as much as it seemed on the surface,” Bespoke wrote.
The research firm didn’t give any indication about when it expected indexes to return to record levels, writing, “Unfortunately, there is no hard and fast rule when it comes to corrections, and that’s what can make them so terrifying when you go through one. You never know when it will end.”