Scared of a Stock Market Correction? This Stat Will Change Your Mind
The past two months have been remarkably turbulent for investors, at least compared to last year's steady stock market incline. Over a span of six days in February, the iconic Dow Jones Industrial Average (DJINDICES: ^DJI), which is nearing its 122nd birthday, logged three of its eight worst single-day point declines in history: a 1,175-point shellacking, a 1,033-point plunge, and a 666-point drop. It's also recorded three of its biggest single-day point gains of all-time over a five-week stretch, beginning on Feb. 6 with a 567-point move higher.
The result of this volatility is that the Dow and broader-based S&P 500 (SNPINDEX: ^GSPC) have undergone their first stock market correction in two years. A stock correction is defined as a decline from recent highs of at least 10%. Though corrections are quite common -- they occur about once every two years in the S&P 500, going back to 1950 -- the more than 50% decline in the Dow and S&P 500 from the Great Recession a decade ago is still fresh in some investors' minds. They see a rapidly declining market and begin to think the worst.
But what if those worrisome thoughts could be put to bed right now?
This'll erase your worries about the current stock market correction
According to the "Flow Show," a weekly Bank of America-Merrill Lynch report on money inflows and outflows, $36.3 billion flowed into U.S. equity funds during the week of March 5 through March 9. This $36.3 billion might not sound that impressive, but it represents an all-time weekly record, dating back to 2002 when the bank began logging money flow data. In fact, $43.3 billion flowed into equity funds overall (also a record), with a measly $2.4 billion going into bond funds.
What's this mean? According to Michael Harnett, chief investment strategist at Bank of America, "Flows indicate clients are positioned for higher EPS, higher short rates, higher bonds yields, [and a] lower U.S. dollar." In an even more basic sense, it implies that higher yields in interest-bearing assets as a result of the Federal Reserve tightening monetary policy and raising interest rates hasn't been enough to pull investors away from putting money to work in the stock market. That's really good news for this now nine-year-old bull market.
Need more proof that you're getting worked up over nothing?
If you're still not convinced that you have nothing to fear from inevitable stock market corrections, here's some additional data to ponder.
First, as noted, stock market corrections are actually quite common. Including the current correction, there have been 36 of at least 10%, when rounded to the nearest whole number, since 1950 in the S&P 500. In each and every correction, save for the ongoing one, a bull market rally has completely erased the decline, often within a matter of weeks or months.
Second, the stock market has a habit of rapidly declining and then rising steadily over time. Though some short-term traders will fear these declines, long-term investors will come to realize they're short-lived more often than not. Since 1950, the S&P 500 has spent just over 6,600 trading days in correction or a bear market (defined as a 20% or greater decline from a recent high), according to data from Yardeni Research. By comparison, the S&P 500 has spent well over 18,000 trading days in a bull market over that time. To make this even simpler, it means an average of three steps forward for every one step back.
And finally, it's not as if the stock market has been all that volatile in recent years. Sure, nominal declines in the Dow of 1,175 points and 1,033 point are bound to rattle Wall Street and investors, but everything has to be put into context in order to be properly analyzed. Both declines represented drops of 4.6% and 4.1%, respectively. In order to register as one of the Dow's 20 worst single-day percentage declines, a 6.98% decline would be needed. It so happens that 23 of the 40 biggest percentage moves in the Dow (its top-20 percentage gains and top-20 percentage losses) occurred during a four-year stretch of the Great Depression, as highlighted in yellow in the table. We haven't seen real volatility in the Dow in almost a decade!
Long story short, if you stick to your long-term investing game plan, you probably having nothing to fear.
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*Stock Advisor returns as of March 5, 2018The author(s) may have a position in any stocks mentioned.
Sean Williams owns shares of Bank of America. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.