Broker Check
Pullbacks and Crashes and Bears, Oh My!

Pullbacks and Crashes and Bears, Oh My!

May 01, 2024

While last week was the best week for the S&P since November, the bulk of April was rockier than the first quarter of 2024. Market volatility after a strong 6-month rally is not unexpected, and is often healthy in the long run. That said, you might have caught pundits tossing around a word that we haven’t heard in a while: “pullback.” If you’ve caught yourself wondering just what a pullback is, we’ve come up with a definition below, along with others for additional events—some pretty unpleasant—that you’re nevertheless sure to come across if you spend any time in the market.

In our combined experience here at Oklahoma Financial Center, we’ve experienced all the scenarios below. While they differ in degree and length, they generally share a few things in common: they will happen (occasionally by necessity, sometimes suddenly) and will test the average investor’s resolve. However, our general advice during these events has always remained unchanged: Keep a diverse portfolio and a cool head, and remember that this is a long game. And, if you know you’ll have trouble doing any of these things, feel free to reach out to us for advice on mitigating risk in your investment portfolio.      

Pullback (5% up to 10% decline)

A pullback represents the mildest form of a selloff in the markets, typically 5-10% after a peak. You might also hear it referred to as a “dip.”

Pullbacks occur 3-4 times a year. Recovery time is typically measured in days or weeks, with an average of 47 days. While “buying the dip” can be a prudent move, it’s also tricky given the short recovery time. (That’s one reason we caution against trying to “time the market” in any manner.)

Correction (10% to 20% decline)

A correction is a sustained decline in the value of a market index or the price of an individual asset. One occurs when economic conditions or major events prompt investors to take a step back. Inevitably, when the stock market rises steadily for an extended period, talking heads on television will start forecasting a correction. Corrections can happen to individual assets (like an individual stock or bond), or to an index measuring a group of assets, or a sector of the wider market. It’s called a correction because historically the drop often “corrects” and returns prices to their longer‑term trend. Corrections occur more frequently than crashes, which we’ll look at shortly.

On average, since 1980, we’ve experienced a correction approximately every 1.5 years. According to another source that measures data a bit differently, corrections occurred in 10 of the past 20 years. It takes a few months to reach the “bottom” of a correction and the average recovery time is similar.

Bear Market (20% or more decline)

These are usually measured from the last peak in values. It’s a (normally) fundamentally driven, prolonged market decline that often coincided with a weakening economy, massive liquidation of securities, and widespread investor pessimism.

Bear markets occur about once every 7 years, though there were two between 2020 and 2023. They can last 15 months, though the news is better for the S&P 500 index—the average bear market in that slice of the market is closer to a year. Some bear markets are much shorter—the “Covid crash” led to the shortest bear market ever, lasting 33 days, in the spring of 2020.

Crash (20% to 30% decline)

Crashes are steep and sudden collapses in the price of a stock or the broader stock market. They usually start with an economic or geopolitical event, and are compounded by rumors and herd behavior.

Crashes typically happen without warning, so they don’t really follow a pattern for timing or recovery period, though there’s enough data to suggest that crashes have happened about every 7-8 years since 1900.

The more you know

It can be challenging in any scenario to “keep your head when all about you are losing theirs” (many thanks to Rudyard Kipling for his advice and inspiration), but one needs to do exactly that to mitigate damage and perhaps even pull ahead. (Remember, the Covid Bear Market recovered in a mere 5 months to reach all-time highs. Those who pulled out, missed out.) However, you don’t need go it alone, or dread a never-ending test of willpower. You can count on us here at Oklahoma Financial Center to give sober, unbiased, forward-looking advice no matter what direction the market is headed.