• I analyzed S&P 500 trading data from over the past 90 years and compared how this correction compares to others.
• This is the fastest correction in the data group, hitting the 10% technical correction threshold within six trading days.
• Trading volumes are exceptionally high, exceeded only by those in the November 2018 and 2008 corrections.
The coronavirus outbreak triggered the 2020 stock market correction. The question on everyone’s mind is: When is it time to trade the 2020 market correction? My working assumption is that there is little to no long-term impact of the coronavirus. While Covid-19 might wreak some short-term havoc, in the long term it is unlikely to create fundamental structural market change.
In order to try and figure out where we are in the correction cycle, I analyzed historical S&P 500 (SP500) data to pick out underlying patterns.
I downloaded S&P 500 trading data from the beginning of 1928 through to today. Over that time period, I identified 24 episodes in which the S&P 500 entered correction territory, as defined by a fall of 10% or more from a recent high. Within those correction episodes, there were times were the index would enter correction, reach an initial low, climb somewhat, and then fall by 10% or more again. This added another 47 episodes to my data set.
The coronavirus correction is the fastest ever. This is the fastest time in which the S&P entered correction territory, taking a mere six trading days in which to do so.
The list of the top five fastest corrections includes the Great Depression yet excludes the Financial Crisis of 2017, which took 33 trading days in which to enter a correction. The list also includes the tech crash of 2000, which narrowly misses the list by one day. There appears to be no trend over time, and so the fact that the top two are most recent is not necessarily indicative. While it is true that high frequency trading has taken off in recent years, the corrections of November 2018 and August 2015 took one and a half months and two months, respectively, before entering correction territory. Over the 90-year data set, no clear patterns emerge.
Where a clear pattern does emerge, unsurprisingly, is the maximum daily trading volumes during these corrections.
The volumes become so large from 2000 onward, and particularly from 2007, that the previous correction maximum daily volumes simply appear as dots on the graph axis.
The question that everyone is asking is: Is it time to buy into stocks? So far, none of the analysis has helped answer that question. Next, I plotted the speed in which a market correction was triggered against the time it took to hit the low of that correction. An interesting pattern emerged. Generally, the faster a correction was triggered the faster the low of that correction was hit, and the market began to climb again.
There are a few notable outliers – in particular, the Great Depression and the Tech Crash of 2000. In both cases the correction was triggered within 3 weeks, but it took around three years on each occasion to hit the low. Against these outliers there were five corrections in which the corrections were triggered and markets hit the lows of that correction in three months or less. In three cases, the low was hit within three weeks consecutively to the correction being triggered.
Here is one last graph to try and understand the coronavirus stock market correction. Does the speed of this correction impact the magnitude of the correction?
No clear correlation emerges here, with the faster corrections perhaps being slightly larger in magnitude than those that take more time. However, the gradient is slight and correlation weak.
While the coronavirus stock market correction might be the fastest ever, such a fast drop is not unique. Once into correction territory, the market has fallen both harder and faster in the past. In the past seven trading days the market has fallen 12.8%. When looking at the last 90 years there are 23,000 such seven-days periods. This is the 81st steepest fall. This puts it well into the steepest percentile. Over the following seven trading days those 80 steeper drops, on average, climbed 1.4%. However, there is no pattern. In the most extreme case in the following seven trading days the market fell a further 26.9%, while on the other extreme the market bounced by 21.9%. On 48 of the 80 occasions the market climbed in the following seven-day period.
So, are there any takeaways on whether it is time to invest in the coronavirus stock market correction? There are, unsurprisingly, no clear trends as to what the market might do next. The only pattern that does emerge is that the faster a market enters technical correction territory, the faster that market hits its low. However, there are clear outliers to this as well.
I feel that “time in the market” is greater than “timing the market.” Most investors that try and time the market lose. With that said, if you have cash lying around to invest, this is probably a good time to start buying. The stock market is clearly cheaper than it was a week and a half ago, and the historical data shows that there is a tendency for fast falls to hit their lows quickly. This may well not be the bottom of this correction, but there appears to be a likelihood that we will hit the bottom soon – if we have not done so already. A systematic strategy that buys into the market over time will diversify some of the risk.