Why It Pays to Stay Long During Market Corrections

This "signal" kicked off Black Monday, the dot-com bubble, and the global financial crisis... And it just flashed again last month.

The S&P 500 Index officially fell into correction territory in late October. In other words, stocks dropped more than 10% from their July peak.

Buy-and-hold investors have watched their losses mount for months. And many believe the 2023 bull market is already over...

But history shows this 10% dip isn't the end of the world. In fact, this kind of volatility is right in line with some of the best-returning years in stock market history.

Let me explain...

The S&P 500 rallied nearly 20% through July this year. Since then, though, stocks have been grinding lower. And investors are spooked...

We can see this sentiment shift using the Bank of America ("BofA") Bull & Bear Indicator. This metric looks at a variety of sentiment markers – such as hedge-fund positioning, market breadth, and bond and equity cash flows.

Bank of America then boils all the data down to a reading from zero to 10. A score of less than 2 shows "extremely bearish" sentiment. And a score above 8 shows "extremely bullish" sentiment.

In October, this measure slid to 1.5... its lowest level since November 2022.

It's not just BofA's indicator, either. The recent American Association of Individual Investors ("AAII") Sentiment Survey is in the dumps too...

This weekly measure asks individual investors about their market expectations for the next six months. Respondents must identify as either bullish, bearish, or neutral.

The October AAII bullish reading plunged 5 percentage points to just 29%. That's well below its historic average of 38%.

Investors are bracing for the worst. But it might be too soon to sell out of stocks completely... because even in years when the market soars, corrections like these – or even worse – happen all the time.

To see this, I highlighted every year the market gained more than 20% going back to 1928. These were the absolute best years to be a stock investor. Then, I found the biggest drawdown for each year.

Over the last 95 years, there have been 26 in which stocks rose 20% or more. But many of these bull runs contained big drawdowns too. Take a look...

During these bull markets, the maximum drawdown was 11.6% on average. That means the 10% dip in 2023 is right in line with the average for the best-returning years ever.

Of course, stocks could fall further from here. But history shows it's still too soon to give up on the market. Today's extreme pessimism could even fuel a big rally to end the year.

A 10% drawdown is painful... but it isn't a definitive bull market killer. Stocks still have room to run – so don't let this correction shake you out of the market.

Good investing,

Sean Michael Cummings

Further Reading

This bull market is still in its early stages. And when the rally is just beginning, investor sentiment tends to falter at the first sign of trouble. We've seen that happen in this year's correction. According to one signal, though, the recent spike in fear could mean big gains from here... Learn more here.

"If history plays out as expected, you still want to own stocks today," Brett Eversole writes. The S&P 500 suffered a four-week losing streak last month. A stretch of down days that long is rare. But don't write off stocks just yet – because history shows the recent pain could pave the way for a rally in the months ahead... Read more here.

Market Notes



CBOE Global Markets (CBOE)... trading-exchange operator
Tradeweb Markets (TW)... online trading platform
Aflac (AFL)... insurance
Assurant (AIZ)... insurance
Welltower (WELL)... health care REIT
Logitech (LOGI)... electronics
Garmin (GRMN)... GPS and wearables
Walmart (WMT)... "World Dominator" of discount retail
Deckers Outdoor (DECK)... lifestyle footwear
American Eagle Outfitters (AEO)... apparel
Trane Technologies (TT)... HVAC manufacturer
Linde (LIN)... chemicals
Murphy USA (MUSA)... gas stations
Sunoco (SUN)... fuel distributor
Frontline (FRO)... oil tankers
Antero Midstream (AM)... natural gas
Range Resources (RRC)... fossil fuels
Cameco (CCJ)... uranium
Leonardo DRS (DRS)... "offense" contractor


Agilent Technologies (A)... lab tools
Clorox (CLX)... cleaning supplies
Etsy (ETSY)... online marketplace
Estée Lauder (EL)... cosmetics
Ford Motor (F)... automaker
BorgWarner (BWA)... auto parts
MasTec (MTZ)... infrastructure and engineering
Chevron (CVX)... oil and gas