We saw it this morning–after a rough week in the market, we opened this morning to a 1000 point drop in the Dow Jones and nearly a 10% drop in the S&P 500. Amidst all the panic and volatility, many are wondering if this trend is going to continue. Are we entering into a major market correction?

 

Will History Repeat Itself?

 

Can we say with any degree of certainty that this is it? The market is tumbling and will continue to? No, we cannot claim that. We do not have a crystal ball to help us predict the market. But we can turn to history and review the consistent stock market trends to help us make sense of the current conditions.

 

For one, the stock market functions in cycles. Bear markets followed by bull markets. It’s secular. And each cycle lasts about 22 years. 22 years of growth followed by 22 years of stagnation and loss.

 

These cycles have some trends within them. We currently are in a secular bear market. We’ve been on the decline for some time now, and those that put their money in around 2000 are looking at netting zero growth over the past 15 years if they subscribed to the “buy and hold” philosophy. Within these secular bear markets, we typically have seen three major drops throughout, with each subsequent hit to the market being bigger than the first. Our last secular market lasted from about 1966 to 1982, with major drops occurring in 1967, 1971, and 1977 (See chart below). This secular bear market we’ve already had two major hits–the downturn in 2001 and the Great Recession. Will this be the third correction historical trends dictate should happen?

Record Breaking Market? Unlikely.

 

In order to not experience another correction, we would have to have a record breaking market. Without a correction, it would mean the market is rising from here on out. This morning was only a blip, and we will recover and rally into a new era of prosperity. But history tells us we would be breaking three stock market records if this were to be true.

 

First off, We have never recovered from a secular bear market with P/E ratios still in the double digits. They have always dropped before it has gotten better.

 

Secondly, never in our 200 years of stock market history have we recovered from a secular bear market so quickly. This would be the shortest on record. History says we should have at least five more years of this.

 

Lastly, we’ve never had less than three dips before recovering. We are overdue for a correction.

 

So is the correction here?

 

This very well could be the imminent third dip in the market. China is a large market, and if it continues to struggle there will be effects on the  United States. It could not be. We cannot predict the market. We can only speculate.

 

Even if the market does recover temporarily, history tells us we have five more years of the secular bear cycle. How many times can the market take a hit before it tumbles? It is hard to say. History only lends us to believe that it must fall before it can rise again.