The US stock market is sliding in what may or may not presage an extended decline. Whatever unfolds in the weeks and months ahead, the first order of business is recognizing that we’ve been here before by putting the current correction into historical perspective. There’s nothing new under the sun for market corrections, but it can appear otherwise if you’re overwhelmed with recency bias.
Let’s start by showing that the S&P 500 Index has fallen to levels last seen in March 2021. Painful, but hardly extreme relative to the market’s epic gains in recent years.
Nonetheless, let’s not dismiss the fact that the current drawdown is no longer a garden-variety pullback. The current S&P 500 drawdown is roughly -18%, which is deep enough so that it’s no longer accurate to label it noise.
Another way to put the current slide into perspective is by looking at rolling one-year returns (252 trading days). On that basis, the current correction (a 4.4% year-over-year drop) is also looking deeper than usual.
Putting the history of one-year returns into a boxplot offers a clearer view of the distribution history. The next chart shows that the current -4.4% change is below the interquartile range (gray box), which offers statistical support for labeling the decline deeper than usual.
At some point the selling will go too far, setting the market up for a substantial and perhaps sustained bounce. Deciding when that point is near is tricky because every correction/bear market is different and is subject to...