Stock Market Correction: What Happens Next?

We have been digesting a lot of research to start the year and wanted share a few interesting “investment” related snippets. This is just a small glimpse into the mountain of research that we read, subscribe and listen to on a daily basis.

1. What Happens After Stocks Move into a Correction?

Source: Ryan Detrick, CMT @ Carson Investment Research

There are 12 instances where the S&P 500 moved -10% off (“correction”) of an all-time high. Looking forward, what occured for stock investors from the day it moved into a correction (but didn't go into a bear market as classified as -20% decline).

Interesting that 5 of 12 times, the S&P 500 index bottomed the day it went into a correction. And in all cases, the stock index was higher (and never lower), 6 and 12 months later, and higher in all 12 of 12 periods.

This is not a forecast, outlook or the crystal ball for the future, it’s simply the data.

Will this time be different?

We do not know the answer. However, we strongly recommend you do not make dramatic alterations to your investments and retirement accounts based on emotions or market corrections, which are normal and healthy, and rather based on a sound financial plan.

Diversification matters, and if you are diversified, you have likely not suffered losses to the extent as the stock market.

Read: Why are Stock Market Corrections are normal and healthy?

2. Everyone is Bearish

Bearish (negative) sentiment has now been >55% for three weeks in a row.

This has only happened one other time in history… March of 2009 (bottom of the global financial crisis).

3. Find Reasons to be Bullish and not Bearish

Source: Renaissance Macro Research

For the first time since the lows of 2022, we have seen the Investors’ Intelligence survey of bulls (positive) versus bears (negative) invert, with bears now in the majority. We like the I.I. survey for 3 reasons:

1) It is the oldest running sentiment survey spanning all the way back to the early 1960s.

2) Its methodology has remained consistent over that period.

3) Most importantly, it tends to work.

Since 1964, the average inversion lasts 7-weeks, with a median of 4-weeks, and while the subsequent 4-week returns following the initial inversion are mediocre, the 13- and 26-week returns are well above average. The data has gotten better over the last 15-years with the early bear market inversion in the spring of 2022 being the 1 miss out of 8 other inversions since 2010.

This suggests to us that the policy uncertainty and other factors weighing on investors has started to make its way into the consensus opinion of investors, and that tends to be bullish.

At a minimum, we recommend emphasizing the potential bullish outcomes and discounting the potential bearish outcomes as many of them appear to be sentiment based and priced into the tape.

4. Two Good Bullish Days (Friday and Monday)

The S&P 500 just recorded its 2nd straight day with 90% advancing stocks after hitting a 6-month low. Data on forward looking returns below, and as suspected, the upcoming weeks can may still see some whipsaw action but the longer the time frame, the higher probability for positive returns.

Please note that this for informational purposes only. This is research and data to digest and enjoy alongside your Sandbox investment team. We have many clients who are overly pessimistic and others who are looking to be opportunistic, which is exactly what creates a market. This is where you Sandbox team comes in to to assist.