In my daily reading, I’m beginning to see more articles projecting the current market correction to fall into a bear market.  A “correction” is defined as a 10% decline from the market’s peak and a “bear market” is defined as a market decline of 20% or more from the market’s peak.

According to Bespoke Investment Group (as cited in this WSJ.com article), the S&P 500 has experienced 58 corrections of 10% or more since 1927.  43% of those corrections turned into a new bear market.  The average length of the correction within a bull market is 104 days with an average decline of 13.3%.  The length of the current correction is 46 days and the market has declined as much as 14.4% (the market is currently 11.8% off its current peak). 

According to Bespoke, “only 7 of 32 declines of 14.4% or more from a bull market high haven’t turned into a decline of 20% or more.  Once you hit the -20% threshold, the average bear market decline is 35.49%.”

That last bit put me on the edge of my seat, but my intent is not to scare you.  Regular readers know I’ve preached that the road to recovery will be uneven and bumpy.  Consider this the first major bump in the road – the stresses induced and questions raised from this current sell-off may slow down the economic healing process.  All signs still point to global economic growth remaining positive, but hints of decelerating growth have sent market sentiment into the doldrums.

To turn things around, we are first going to need to see the debt markets return to health (see my comments on LIBOR a few weeks ago).  Second, we need to confirm that the financial stresses of the past few months have done little to damage to the real economy through confidence or the credit channel.  Unfortunately, it will take time for markets to make that assessment and, thus, we may have elevated volatility for most of this summer.  If you haven’t read my Tips For Market Volatility, I encourage you to do so.

On the positive side, market valuations are becoming more attractive.  In uncertain times, it sometimes helps to go back to the basics: try to buy good businesses and try to get them when they’re relatively cheap.  And of course, stay well-diversified.

Peter Lazaroff, Investment Analyst

www.acrinv.com