Is 10% stock drop a good time to buy?
When it comes to stock market “corrections,” or 10%-plus drops, some are more sinister and financially debilitating than others.
Stock downturns that occur due to recessions are the nastiest of all, with average drops of 25.3%, according to Strategas Securities’ analysis of 21 corrections since 1990. Double-digit percentage declines that occur amid an ongoing bear market — or longer-term stock downtrend — are also tough on investor account balances.
The good news is that corrections that occur during periods when the economy is not contracting and stocks are not in bear-market territory — like the current swoon that knocked the S&P
500 stock index down 10.2% from its January peak — result in smaller market declines and bigger rebounds. The average market declines are 14.2%.
More important for investors wondering if they should buy stocks after the big dip is that the large-company stock index is up 16.5% three months after the end of these non-recession driven corrections. That compares with smaller rebounds of 10.9% during recessions and 13.8% for all correction periods, Strategas says.
This historical data suggests the recent carnage in the U.S. market could prove to be an opportunity to snap up stocks at cheaper prices, according to analysts at Strategas. “Most market corrections,” the analysts concluded, “prove to be (good) entry points.”
The problem: It’s still unclear if the correction is over, despite the market’s
5% rebound the past five sessions. True bottoms are only known in hindsight.