Taken from a monthly newsletter published by Provident Investment Management
The second half of August brought an unfriendly reminder of why stocks are generically called “risk assets.” In just four trading days in August, the S&P 500 declined approximately 10%, ultimately notching a low price that was more than 13% below its all-time high set in May of this year. A market decline of 10% or more is labeled a “correction,” and U.S. investors just experienced their first correction in more than four years.
In a sense, this move was long overdue. Research by Sean Williams of the Motley Fool finds that the S&P 500 has corrected 33 times and spent about 28% of its life in correction territory over the past 65 years. Waiting four years between corrections is unusually long.
Corrections are a normal, recurring phenomenon, but investors can have short memories. The irony of going so long between corrections is that the possibility of correction feels more remote as the next correction becomes more overdue. Media outlets including CNN, Bloomberg, NBC, The Washington Post, Chicago Tribune, Business Insider, and MarketWatch all referred to August’s move as “wild” or “a plunge.” It was no such thing in our opinion, just the sort of garden-variety downswing that typically comes along every couple of years. The short time over which the correction unfolded was unusual, but downward moves have always happened much more quickly than upward moves throughout stock market history.
Pardon the analogy, but we are reminded of standup comedian Chris Rock’s observation after a tiger mauled its handler during a live Las Vegas magic show. The media lit up saying the tiger went crazy. “No, he didn’t,” said Rock. “That tiger went tiger.” Mauling things is what tigers are supposed to do. So it goes with the stock market; choppy long-term gains and occasionally violent short-term losses is exactly what the stock market has always done. Again, that’s why stocks are called risk assets.