Some talking heads have referred to the recent market downturn as a crash. It's not. Yes, many individual stocks have been decimated. Yes, the speed of the descent has been dramatic – LPL Research's Ryan Detrick notes it took only 14 trading days for the S&P 500 to fall 10 per cent from all-time highs, its fourth-fastest move in history.
However, a double-digit correction is not a freak event – it's normal. Historically, the US market has experienced double-digit drawdowns in roughly two-thirds of all years, notes Ritholtz Wealth Management's Ben Carlson.
Even when there has been a correction of 10 per cent or worse, 60 per cent of those years ended with stocks posting positive returns. Two out of every five of those years saw stocks finish the year with double-digit gains.
Carlson’s colleague, Barry Ritholtz, makes the same point, saying volatility is “a feature, not a bug of markets”.
Investors were lulled into complacency into 2021, he says, when stocks went straight up with almost no pullbacks. Consequently, a bi-directional market “feels wrong”, but the reality is that 2021 was the outlier.
Things may get worse, says Carlson, “but it’s important to understand this risk is nothing new”, he adds. “Stock market corrections are perfectly normal.”
