Lean into the stock market’s patterns

Every stock market move feels momentous and unique. In reality, stock market oscillations regularly run through a gamut of basic configurations, including bull markets, bear markets, dips, corrections and flat cycles.

Investors who understand these patterns — particularly the declining ones, when fear takes over — can set reasonable expectations and hopefully make better investment decisions.

“Being aware of market history can help calm nerves,” says Sam Stovall, chief investment strategist at CFRA Research. Here are some patterns to watch for. Annual dips: Every calendar year, the S&P 500 index tends to dip by 5.0% to 9.9%. Any decrease that doesn’t exceed 5.0% is just “noise,” says Stovall, but “people tend to start to freak out once we pass the 5% threshold.” Some strategists call this a pullback, which is appropriate because the downturns tend to be short and quick. Corrections: Some pullbacks, of course, don’t rebound and instead continue to decline. A market drop of 10.0% to 19.9% is considered a correction. Since the end of 1945, the S&P 500 has experienced 23 such declines, but they didn’t last long. On average, the market had recovered to its break-even, pre-correction peak in four months.

Bear markets: Bear markets — defined as a market decline of 20% or more from its most recent high — occur on average every 3.8 years, according to investment research firm InvesTech Research. But compared with other market patterns, bear markets tend to be more volatile and longer lasting.

Recovery from a bear market takes an average of 27 months. Stovall considers a pullback or correction to be over only when the market has fully recovered all that was lost during the downturn; a bear market only needs to climb by 20% from its lowest point to be considered “back in the black,” he says.

No one wants to meet a bear on their path, but most would rather confront a black bear than a grizzly. Market drops of 40% or more qualify as “mega meltdowns,” Stovall says. Two mega bears occurred in recent history — the great financial crisis from 2007 to 2009 (down 56.8%) and the dot-com bust from 2000 to 2002 (down 49.1%). The farther they fall, the longer it takes to recover: Garden-variety bears have averaged two years from peak to recovery; mega meltdowns have lasted an average of 6.8 years.

Flat markets: In a rangebound market, such as the one many strategists think we are in now, stock prices bounce between an upper and lower level without a strong move in either direction.