What is a Stock Market Crash?
When stock prices suddenly and significantly fall, it is referred to as a “stock market crash.” Stock market crashes can happen amid an economic crisis or a significant catastrophic event. They are frequently caused by various economic causes, such as speculation, economic bubbles, or panic selling. Although there isn’t a set cutoff for what constitutes a stock market collapse, a sudden double-digit percentage loss in an index of stocks over a few days, like the Dow Jones Industrial Average or Standard & Poor’s 500 Index, is considered to be one.
Market Corrections vs Crashes
Worried why US stocks are failing? Media and news outlets seize the chance for a click-worthy narrative whenever the market dips. Now, this “narrative” doesn’t always make it clear what is going on exactly. Let’s clarify the distinction between a market correction and a market crash, as these terms are frequently used (and sometimes interchangeably).
- Market correction: Although there isn’t a conventional definition, a correction is generally understood as a decrease of over 10% but lower than 20%.
- Market crash: A decline of at least 20%.
Here is the list of similar declines since 1950 in the stock markets and the duration it took to recover:
Stock market crashes since 1950 | ||
Dates | Price Decline (in %) | Length (in days) |
2nd August 1956 – 22nd October 1957 | -21.63 | 446 |
12th December 1961 – 26th June 1962 | -27.97 | 196 |
9th February 1966 – 10th October 1966 | -22.18 | 240 |
29th November 1968 – 26th May 1970 | -36.06 | 543 |
11th January 1973 – 3rd October 1974 | -48.2 | 630 |
28th November 1980 – 12th August 1982 | -27.11 | 622 |
25th August 1987 – 4th December 1987 | -33.51 | 101 |
24th March 2000 – 21st September 2001 | -36.77 | 546 |
4th January 2002 – 9th October 2002 | -33.75 | 278 |
9th October 2007 – 20th November 2008 | -51.93 | 408 |
6th January 2009 – 9th March 2009 | -27.62 | 62 |
19th February 2020 – 23rd March 2020 | -33.92 | 33 |
Average | -33.38 | 342 |
Source: Covenant Wealth Advisors
How Long Does A Stock Market Correction Last?
In contrast to a correction or dip, an actual market crash can be brutal. Bear market falls since World War II are depicted in the graph below. Each blue line shows a market decline of 20% or more since that point and the number of days it took for the market to recover.
Stock values are frequently reduced by 36% during bear markets. While the average recovery period is four months, it could take between 18-20 months to regain the levels. However stock market recoveries take much longer, on average requiring roughly 2.5 years. For comparison, the stock market’s rebound from March 2020 took just six months.
However, the market can quickly rebound once it begins to turn. Just four months are needed for a correction to recover on average! Due to this, if you are looking to invest in US stock market with genuinely diverse portfolios, you may think about continuing to invest over time. Crash rates are lower than correction rates. Since 1980, the market has decreased by 10% or more a year on average; therefore, one might even say that corrections are frequent. Again, it’s not a machine, but understanding this should help you make sense of events as the market declines.
How Long Does it Take to Fully Recover?
If you want to invest in US stock market, it is essential to note that in terms of adjusted for inflation, the situation is worse when it comes to fully recovering. For instance, despite the US market nominally recovering its dotcom losses before October 2006, it did not achieve break-even status in terms of inflation until April 2013. On the other hand, over the past 148 years and 2 months, US equities have returned an astonishing 8.9% annually, outpacing inflation by 6.7% annually. US currency only generated an annual return of 4% throughout that time.
Remember 1970? How Did the Market Perform in the Second Half After the Worst First Half?
According to information gathered by Dow Jones Market Data, the S&P 500 has recovered after prior first-half drops of 15% or more. However, the sample size is tiny, with only five examples dating back to 1932. (see table below).
Source: Dow Jones Market Data
Each of those situations saw an increase in the S&P 500, with a median increase of 15.25% and an average increase of 23.66%.
Timeline of contemporary stock market crashes:
Stock Market Crashes: How to Prepare and Not Panic
- Know what is owned by you and why
A brief decline should not be used as justification to panic-sell an investment. Looking back at your first stock research notes, you may find some strong reasons to sell. A thorough stock analysis includes a written description of the advantages, disadvantages, and intended usage of each asset in your portfolio and the potential reasons why each investment might wind up in the “out” box. Like a road map for investing, your study acts as a physical reminder of the qualities that make a stock valuable to hold.
This approach can help you avoid getting rid of a perfectly fine long-term investment from the portfolio simply because it had a bad day during a market slump. However, it also provides logical arguments for stock sales. Before investing in equities, evaluating how much volatility you can tolerate or risk tolerance in exchange for higher potential rewards is ideal. The risks of investing in the stock market are inherent. Still, the long-term success depends on an investor’s ability to put up with the discomfort and continue making investments in anticipation of the inevitable recovery, which historically has always been in sight.
- Believe in Diversification
Diversifying your portfolio or investing in various investments is crucial to reduce investment risk and navigating an unpredictable market. By diversifying your investments, you can keep them from becoming excessively dependent on one type of asset. As a result, if a specific stock or industry has a bad day, your other assets may be able to assist you in recovering some of your losses.
- Be prepared to buy the dip
Market declines may also offer an opportunity to buy. Think of it as buying stocks at a lower price during a market downturn. The secret is to be ready for the decline and willing to spend some money to buy assets whose costs are falling. If you buy the drop, it doesn’t matter if you don’t obtain the stock at its lowest price. While making investments that you feel have excellent long-term potential, the goal is to take advantage of possibilities.
So, don’t be surprised if you don’t act when the chance presents itself. One strategy for overcoming the concern of poor timing is to dollar-cost average your approach to the investment. Dollar-cost averaging helps to level out the purchase value over time and puts your money to work while other investors are either waiting on the sidelines or running for the exit.
- Second opinions do not hurt
Investing is rewarding whenever the stock market grows and your portfolio’s worth rises. However, self-doubt and dumb tactics can get entrenched when things are challenging. The risks of short-term thinking can affect even the strongest self-assured saver-investor. Avoid allowing self-doubt to derail your financial aspirations. Consider hiring a financial advisor to look through your portfolio and provide a dispassionate assessment of your financial strategy. For the same reason, financial planners frequently work personally with their own financial advisers. Another advantage is knowing you can call someone for support during trying times.
The Response Matters
A portfolio’s worth will likely rise more quickly through additional investments than inaction. As a result, it has also been determined how long it will take to return to the pre-crash level and the worth of additional investments for the double-down response. Remember that the stick-with-stocks findings are identical to those displayed earlier in the table below.
Source: Schroders.com
There is a genuine danger that people will be so badly affected by recent events that they won’t put money into the stock market for a while and instead scramble for money. But according to studies, historically speaking, it could be the worst financial choice a shareholder could have made. It practically ensures that recovering losses will take a long time.
For instance, investors who switched to cash in 1929 following the Great Depression’s initial 25% decline would have needed to wait till 1963 to reach breakeven. If they had continued to invest in the stock market, they would have reached breakeven in the early months of 1945. Recall that the stock market finally saw a decline of almost 80% during this catastrophe. So, switching to cash may have prevented the worst losses during the crash, but it still turned out to be the poorest course of action over the long term. Similarly, an investor who switched to cash in 2001 after suffering the first 25% of the dotcom crash losses would discover that their portfolio is currently only worth about 90% of what it was in 2000.
The Bottom Line
If you are planning to invest in the US stock market, note that there are several options available with Stockal to invest during a recession. From dividend yield stocks to exchange-traded funds, to find more on how to invest in the US stock market, go to Stockal.