We’re At The “Ross And Rachel” Stage Of Stock Market Corrections

We’re At The “Ross And Rachel” Stage Of Stock Market Corrections
Stéphane Renevier, CFA

almost 2 years ago1 min

Mentioned in story

With the S&P 500 now having fallen 10% from its peak at the start of the year, it’s worth exploring how the index has performed since 1950 whenever there’s been a correction of that size. And history tells us that stocks tend either to see an attractive 10% gain if we avoid a recession, or suffer a small loss if we don’t. It’s a classic “Will we, won’t we?”

Before I get to whether that makes for a buying opportunity, a couple of observations. First, there was no recession in the following 12 months twice as often as there was, suggesting we’re twice as likely to see the positive scenario (all else equal). Second, the chart above depicts the median, which isn’t influenced by extreme measures the same way the average would be. In other words, stocks could fall far, far below that median scenario.

Don’t get me wrong: this chart definitely shows there’s a case for buying the dip – but only if you think we’re going to steer clear of a recession. As for how likely that is, you’ll need to ask yourself one very important question: is a recession more or less likely today than it has been on previous occasions? If you read my next Insight, you’ll know where I stand…

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