When will the U.S. stock market return to record levels? If history is any guide, it could be sooner than you think.
Stocks have seen solid gains thus far this month, as is typical for April, with all three major U.S. indexes up more than 2%. That rally has helped them close the gap with the all-time highs hit in late January.
The length of time since that record could be a reason to feel optimistic about stocks, according to one analyst.
“On average, stocks fall for about 13 weeks after a correction before beginning to rebound,” wrote Jeffrey Kleintop, the chief global investment strategist at Charles Schwab & Co. Based on that, he wrote in a note, the “stock market correction might soon be over,” although he cautioned that “the heightened volatility may not be going away for a long time.”
“The stock market may revive as the earnings reporting season unfolds and tax refunds are invested over the remainder of this month,” Kleintop wrote. “Of course, markets could still suffer losses this month as worries over trade wars, currency wars, and actual war—among other factors—combat investor confidence.”
Don’t miss: The tax bill accelerated the bull market — and may make its end more painful
The view that the correction may be running its course has been supported by other historical trends. According to Goldman Sachs, “the typical correction took 70 trading days to trough and 88 days to recover.” Including Tuesday’s session, the S&P 500 has been in a correction — defined as a 10% drop from a peak — for 48 trading days.
Currently, the S&P 500
is 5.9% below its record, while the Dow Jones Industrial Average
is off 7% and the Nasdaq Composite Index
is down 4.8%.
The S&P fell 10.2% from its closing peak to its most recent closing low. That’s a relatively mild pullback. According to Bespoke Investment Group, the median decline for all corrections — including ones that mark the start of a recession — is 16.4%.
Even if the current cycle doesn’t extend into a drop of that magnitude, the odds are good that significantly worse performance — such as a bear market, or a 20% drop from a peak — isn’t in the cards.
According to Goldman Sachs, of the 36 corrections that have been seen in the S&P 500 since the end of World War II, 24 of them didn’t presage a recession. And of those, 20 of the corrections didn’t expand into a bear market. In other words, about 55% of all corrections didn’t lead to a bear market, compared with the 19% that led to both a recession and a bear market, and in those cases, broader economic factors—as opposed to merely a decline in stock prices—were the driving factor.