A Winter Stock Market Dip? - What's Next?

Over the past 19 months, investors have witnessed history on both ends of the spectrum. They've navigated their way through the quickest decline of at least 30% in the history of the stock market and they've subsequently revelled in the strongest bounce-back rally from a bear market bottom of all time.

Since bottoming out on March 23, 2020, the benchmark index has more than doubled in value. But this monster rally begs the question: Is another stock market crash or potentially steep correction around the corner, and should you be worried about it?

If you're a short-term investor/trader, you have reason to worry. We're never going to know precisely when a stock market crash will begin, how long it'll last, or how steep the decline will be. We also rarely know what'll cause a crash or steep correction until after it's begun.

Thus, expecting a big decline in the market is a bit of an inexact science. With that being said, there are a number of figures which suggest a stock market crash could be on the horizon. For example, the performance of the stock market following each of its previous eight bear market bottoms, dating back to 1960, is telling. In the three years following each of these bear market bottoms, the broad-based index pulled back by at least 10% once or twice.

We're now nearly 1.5 years removed from the coronavirus crash bottom, and the market has yet to endure a double-digit percentage decline. In fact, we've now gone 10 months without even a 5% pullback.

Bouncing back from a recession has never been this smooth or easy. On the other hand, if your holding periods are measured in years or decades, stock market crashes aren't something to fear. In fact, they're historically an excellent time to put your money to work.

To begin with, even though stock market crashes and corrections are quite common, they don't last very long. For example, of the 38 double-digit percentage declines in the broad-based S&P 500 since the beginning of 1950, the average time it's taken to go from peak to trough is 188 calendar days (about six months).

The average length of corrections has grown even shorter since computers became mainstream and information could be easily disseminated at the click of a button. Since the mid-1980s, the average correction length has dipped to 155 days, or about five months.

Though big moves lower in the market can pull at our heartstrings as investors, it's a lot easier to remain invested with the understanding that bull markets last considerably longer than bear markets. It's a simple numbers game that absolutely favours optimists.