With the S&P 500's index 20% drop from its all-time high, the stock market has officially entered bear territory. Here’s a look at what happened and the returns investors historically see after a market correction.
What Happened: The S&P 500 dropped to a low of 3,750 on Monday, marking the lowest level for the index since March 2021.
The well-covered index marked a decline of 20% from its all-time high on Monday, putting the stock market into a bear market for many who use this determining factor.
The SPDR S&P 500 ETF Trust (NYSE:SPY), fell over 2% on Monday and is down over 21% year-to-date.
The Labor Department reported an 8.6% increase in the Consumer Price Index on Friday, which was the highest inflation rating since 1981.
The first 100 trading days of the 2022 year represent the fourth worst start for the S&P 500, according to data from LPL Financial.
Only 1932 (Great Depression), 1940 (World War II) and 1970 (Vietnam War and recession) had worse starts to the trading years.
Related Link: How To Prepare For The First Bear Market Of Your Trading Career
What Happens Next: The S&P 500 has been in a correction since Jan. 3, LPL Financial Chief Marketing Strategist Ryan Detrick previously noted.
The average market correction is -14.9%, marking the current correction worse than average. The average market correction has lasted 88 days since 1980. This correction is at over 130 days and counting, lasting much longer than those on record.
“If it feels like this year hasn’t had many green days, that is probably because that is quite true,” Detrick said.
While no one can pinpoint exactly when we will exit the bear market, there's good news for investors when looking at historical averages.
The average one-year return from the low of a correction is 23.% since 1980. The average two-year return from the low of a correction since 1980 is 37.5%.
Only two times out of 24 has the market been negative for the year after the correction, which could be a hopeful note for long-term investors.
Looking at significant market corrections that have entered bear territory, Detrick offers this hopeful comment.
“As rough as bear markets are, the good news is the future returns really improve once stocks are down 20%. In fact, a median gain of nearly 24% a year after a bear market starts may help some beaten-down bulls confidently stay the course.”
In only three instances were stocks lower a year after a bear market, and all three years were linked to major recessions, Detrick said.
“We do not see a recession on the horizon, which could be a clue returns could be strong going out a year.”
Looking To History For Recovery Timeline: On average, it takes stocks 19 months to recover from bear market losses completely. The past three bear markets took less time with five, four and four months, respectively, needed to gain back from losses.
“Should this bear market end soon, it could bode well for a quicker recovery once again.”
Detrick notes that for the number of bear markets investors have seen, stocks have always come back and hit new highs.
“We do not know when this one will, but we don’t expect this incredible streak to end now.”
Detrick also noted that years that started significantly down in their first 100 days, like 2022, often have strong returns in the second half of the year. The previous five years with the lowest first 100 trading days saw gains of 19.1% on average.
Price Action: The SPDR S&P 500 ETF is up 1% to $377.69 on Wednesday.
