The Stock Market Rarely Drops More Than Two Weeks in a Row
Disclaimer: This post does not constitute financial advice. Do your own due diligence before making an investment.
Don’t panic. This will probably be over sooner than you think.
We seem to be in a bit of correction here (March 8th, 2021) so I thought I’d do a quick article to alleviate some panic.
The current Nasdaq correction (into its 4th week now) seemed a bit extreme, so I thought I’d go back through the history of the index and see how often something like this has happened.
The answer is: Rarely.
The Nasdaq rarely drops more than two weeks in a row. I looked at the weekly candles going back to November 2009.
Here’s the data.
As you can see, most of the time, if the Nasdaq drops more than one week in a row, it stops at two weeks. A correction sometimes goes for three weeks, but it’s rare. Only 17.24% of the time.
After the correction is finished, the index resumes its upward trend.
Indexes have always recovered, and they always will.
Stocks indexes will always go up over time unless there’s a catastrophic event that wipes out the population. This is because humans can’t sit still. We’re driven by the need to do stuff. Create. Build. Improve. We love it.
We also like to have babies. More children means more consumers which leads to higher sales across the board.
There’s also inflation. Money is injected into the economy on a yearly basis which inflates the current supply of cash. A lot of this cash eventually ends up in the hands of rich people who use it to buy stocks.
You should never be worried about indexes cratering to zero. That would reflect the end of life as we know it. It would have to be something like a giant meteor, alien invasion, or world-destroying volcanic activity. But even then, unless an event wipes us out 100%, humanity will recover.
Here’s the data for the S&P 500.
See how it lines up pretty similar to the Nasdaq?
This is how it’s always going to be. Stock markets always recover.
There are lot things that can account for this. One of them is the fact that every few weeks there is a wealth transfer from the rich to the poor. This comes in the form of paychecks.
After they get paid, people look at the stock market. They see that stocks are a lot cheaper than they were last month. Maybe insanely cheaper if you’re into the fourth week of a correction.
“Wow,” they say. “I’m gonna buy everything I can.”
And this starts the rebound.
Interestingly enough, I noticed that whenever there’s a multi-week correction, the recovery is often quicker than the drop. Especially if it was a two or three week drop. Those can recover as quickly as one week later.
Short drops usually recover like this.
Large drops take longer to recover. They tend to look like this.
So if you’re reading this article and the market is crashing. Don’t panic. If you can afford to hold for a few weeks, then it’s probably a good idea to hold. Turn off the computer. Disable notifications. Don’t look at it. It’s not going to help.
Time is the only thing that will fix this.
Because…
Indexes always recover.
Always.
UPDATE: April 12, 2021:
As expected, the market has recovered. It took roughly the same amount of time for it to recover as it did to drop. So next time the market takes a three-week dump, just-reread this article and don’t panic.
Thanks for reading, and don’t forget to follow us on Twitter for additional in-depth analysis!