How often should investors expect 5% market corrections?
By John Spence
Is it time to "buy the dip" again? That's what some investors are wondering after the recent stock-market slide, even though the S&P 500 isn't even down 5% from its all-time highs.
It's a natural question to ask, for several reasons. First, U.S. stocks have been in a low-volatility grind higher the past couple years, and there haven't been many chances to buy at lower prices.Also, buying the dip has been rewarding — so far, at least. Some investors may even be feeling invincible. Financial markets "seem as bulletproof as one of those up-armored military personnel carriers you see in war zones," ConvergEx Group said in a recent note. Recent geopolitical tensions in Ukraine and Gaza have yet to trigger a 5% correction in the S&P 500, even with last week's pullback. And the market didn't even seem to bat an eye at a European debt flare-up last month in Portugal. "Why would investors step in, especially with news that would have sent them running just a few years ago? Because every single pullback for over five years has been a buying opportunity in U.S. large cap stocks," ConvergEx said. "Every. Single. One. Equity markets have trained investors to keep buying, so while the bull market is over five years old, it still thinks it 'has it.'" However, investors should be open to the possibilities, especially because it has been so long since we've experienced a major correction. Since 1927, the S&P 500 has averaged a correction of at least 5%, every 71 trading days, or about once every 3.5 months. It has been about six months since the S&P 500 has lost 5%, according to Carter Braxton Worth, chief market technician at Sterne Agee.
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