click for ginormous table
Corrections SPX
Source: Yardeni Research, Inc.


In this morning’s discussion about defining bubbles, a reader made an interesting a posteriori statement: You can tell a bubble after a market has “dived much lower.”

That sent me hunting for some data as to how often markets actually dive. This table is the result of that quick hunt: Dr. Ed Yardeni’s discussion of “S&P 500 Bear Markets & Corrections.” It turns out that these sorts of events are more common than one might have imagined. Defining a correction as a 10 percent or greater drop and a bear market as a 20 percent or worse fall, Yardeni identified 25 such “dives” since 1960. It is interesting to note that we seem to average one of these events (correction or bear market) about every two years.

As to dives — if we make the cut off 30 percent or worse, then we get five examples since 1960: the end of the post-World War II secular bull market in 1968 (36 percent); the 1973 oil-crisis-induced recession and crash (48 percent); the 1987 crash (33 percent); the 2000 dot-com crash (49 percent); and the financial crisis of 2007 (57 percent). Only the last two appear to be bubbles in tech and credit.

I am not sure exactly what to make of these, other than to say that diving markets in and of themselves are not necessarily evidence of a prior bubble.


Originally published at Bloomberg View

Category: Markets

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

3 Responses to “Fun with Corrections!”

  1. rd says:

    In 1977, 20-yr T-bonds were 7.6%. By late 1981 they were at 15% and the street price fo a 20-year bond purchased in 1977 had plunged. Do we think that 1977 bonds were a bubble just because they dropped a lot in price? I don’t think so.

  2. robloebl says:

    This is great Barry, thanks for sharing. Looking at the data from a temporal perspective, it’s clear there are two categories: corrections that occur less than a year after the previous correction, and the ones that occur more than a year after the previous. Among the 20 that occurred within a year after the previous decline, the average length of time before the correction was 3 month (with a standard deviation of 2.25 months) and the average fall in price was 15%. In the other category, the average decline in price was around 47% and the average length of time since the last correction was about 21 months (a year and three quarters) with a standard deviation of just under five months. I’m not sure there is anything
    here that could help predict the smaller corrections, but I do believe there is
    something valuable to be learned from looking at the pattern with the larger
    bears. Just as the largest wildfires happen when there has not been a fire for a long time, the most substantial declines occur when the market has not undergone one of its smaller corrections in a long time (going purely on averages, the market tends–or maybe needs, depending on your philosophy–to correct to the tune of 22% every 7.5 months). If the pattern from these number hold, then we should begin to become concerned about a significant bubble burst when there has not been any correction in the 16 previous months (the mean of 21 months for the category of declines occurring more than a year from the previous minus it’s standard deviation of 5 month). So the question is, where do we stand?

  3. sdpost5 says:

    This may be dating me, but I can still remember a time before the Fed smoothed out the markets and eliminated big dips.