The S&P 500 fell 3.9% on Monday, closing at 1,893. It’s now down 11.3% from its all-time high of 2,134, which it set on May 20.
For you investors, the human brain may have you convinced that the stock market will continue to go down precipitously. And perhapes this 10% correction will evolve into a 20% bear market.
“Equities fell 9% over the past 3-days (a waterfall decline), the 12th worst decline since 1962 and the S&P 500 is now off 10% from its high,”Fundstrat Global’s Tom Lee wrote on Tuesday. “As we noted last week, there are many suspects and culprits behind this move, and the decline is disappointing.”
But Lee points out, history shows that the odds favour the optimists.
Lee reviewed the history and uncovered some stats, which he included in an 11-page note to clients. We paraphrased and excerpted some quotes:
- Of the 44 previous declines of at least 10%, 19 became bear markets (20%+ declines). “Since 1878, any bull market lasting 4 years or more, has turned into a bear market only when the business cycle ends as best evidenced by an inverted long-term (30Y vs 10Y) yield curve — even the 1987 decline (really 33% in a compressed timeframe) saw an inversion of the yield curve in 1986. So unless the U.S. has already slipped into recession, this decline will prove to be a correction. ”
- After a 10% correction, the median days to a bottom is 15. “And the median further decline to a closing low is 3%.”
- Bottoms are V-shaped, and the recovery to the prior peak takes 1.4 times as long as the decline. “The current decline is 35 days, which implies a recovery to prior highs would be 50 calendar days, or October 2015.”
- Markets bounce after 3-day waterfall declines, which is what we just experienced. “Since 1962, after a 3-day 9% slide or more, equity shows a median 7% gain in a week, with a win-ratio of 82%.” The exceptions include Black Friday and October 2008, but these markets were already in bear territory.
Lee warns that persistent weakness in China’s economy and tighter credit conditions in the emerging markets could pull the world into recession.
But his bottom line is this: “A correction does not eliminate a positive thesis on stocks nor negate the bull market. “
Lee has a 2,325 target on the S&P 500.