Everyone wants to know the answer to this question, and every commentator, it seems, has an opinion. We examined S&P 500 price data going back to 1950 and this is what it shows:
There were 46 10% corrections since the beginning of 1950. Out of those 46, 12 of them turned out to be 20% corrections. About 25% of the time a “correction” turns into a “bear market.”
(This is using the now media-standard 10% drop is a correction and 20% drop is a bear market.) In any one case, no one really knows whether a drop is just a short-term correction or the beginning of a bear market. All of the forecasts you have read or seen over the past few days should properly be labeled “guesses.” We wouldn’t even hazard a guess as to the eventual outcome of the current drop, but it is interesting to note that 75% of the corrections since 1950 did not result in a bear market. Most of the time, the correction is contained in the 10-20% range and the market bounces back.
Advisors, however, appear to be gambling heavily on the bear market scenario. Mark Hulbert reports that a rush is on to jump on the bearish bandwagon. Commentaries like this one from Investment Advisor magazine are pretty common. Investment News also reports that advisors are making a mad dash to cash. Based on the historical statistics, there is a certain amount of risk in moving to cash, especially since advisors seem to be driving the change:
Most of the advisers who are moving into cash are doing so on their own, and not as a result of client demand. Just 14.9% of advisers in the InvestmentNews survey who said that they recently moved into cash said they were doing so in response to requests from clients.
In other words, clients are not the ones running to cash. Clients may be quite unhappy if the move to cash does not work out. Even if the clients were driving the change, they might end up blaming their advisors for it–but if it was the advisor’s idea, well, that’s pretty cut and dried.
Of course, advisors could be right and earn clients’ undying gratitude. It’s just that sudden swings to bearishness are often signs of a rally rather than an indication of continuing weakness. Right now the jury is still out. It’s too early to declare victory either way, but allocation changes in response to market swings ought to be considered carefully. No advisor wants to cry wolf too often.
[...] the market is down about -12.5% from the recent peak. That’s not particularly unusual. Our data shows that since 1950, only one out of four -10% market corrections become full-blown bear markets [...]