The recent financial market volatility has many people wondering if this stock-market decline will turn into a bear market. Others are wondering if a recession is imminent. Still others wonder if a full-blown market crash or a financial crisis like 2008 is in the offing.

I don’t claim to have the answer to those questions. However, I do have data that can help put this into context. You are on your own, however, in determining what this means about your own portfolio or trading needs.

Let’s start with the simple truism that while every deep selloff first has to pass the 10 percent correction mark, not every 10 percent correction becomes a deep selloff. I know I have trotted out these statistics so often that you’re bored of them, but once more for the newbies: Since 1950, the Standard & Poor’s 500 Index has experienced a decline of 10 percent or more once every two years on average. Note that the distribution doesn’t fit some nice, clean pattern and it isn’t just even or odd years. Like waves, there is a tendency for declines to come in sets. Think of it as periods of greater or lesser volatility.

I would be remiss if I failed to acknowledge both the rapidity of the current decline and its inauspicious beginning at the start of the new year. That makes it emotionally feel much more significant than a standard 10 percent correction. (But we know how misleading those emotions can be.)

Why is 10 percent classified as a correction? It’s the first double-digit number in our counting system, but it is also how many fingers you are supposed to have. Either explanation suffices, with “Why not?” just as good an answer as any.

About those bear markets: Since 1928, we have seen at least 23 selloffs of 20 percent or more, which is the official definition of a bear market. Again, why 20 percent? There is no better explanation than that it’s the total count of digits -- fingers and toes -- most of us have. It is also double the magnitude of a correction. Let’s simply agree these numbers are completely arbitrary, and move on to more relevant data.

Those 23 bear markets over a span of 85 years work out to one about every 3 ½ years or so. As the chart below shows, their appearances as indicated by the gray bars are not a smooth Gaussian distribution. Look at 1946 to 1958 or 1988 to 1998 -- we sometimes go a decade or so without a bear market. My colleague Michael Batnick also observed that “drawdowns of 20% or more have happened 26% of all years. On five of those 23 occasions, stocks still ended up positive on the year. . . It’s not unusual for those double digit declines to be of little importance. 57% of the years with 10% drawdowns finished positive.”

David Fuller's view

Barry Ritholtz provides useful information while keeping his ego firmly under control.  In saying that he does not know the ongoing implications of this market correction, he allows readers to draw their own conclusions, presumably on the basis that your thoughts on this topic may be as relevant as anyone else’s. 

Nevertheless, we can gain a little more perspective from the useful chart Barry provided, plus some additional information posted on this site last week.

The two longest periods without a statistical bear market of 20% plus on Wall Street occurred between 1946 to 1958 and 1988 to 1998.  Those were the latter years of the previous two secular bull markets.  These were followed by lengthy choppy, ranging periods, which I have often referred to as valuation contraction cycles, which also contained at least two significant bear markets. 

Currently, I believe we are in the latter stages of the valuation contraction cycle commencing in 2000, although it commenced a year or two earlier for ‘old economy’ industrial and resources sectors.  I believe the current cycle has been distorted somewhat by QE, not least in terms of Wall Street’s higher valuations in recent years. 

Consequently, another cyclical 20% plus bear trend on Wall Street may be required to lower valuations before we commence the next secular bull market, created by accelerating technological innovation, cheaper energy and the increasing middle-classes which we see in most capitalistic economies.