Fun With Corrections!: Ritholtz Chart

Barry Ritholtz is a Bloomberg View columnist. He founded Ritholtz Wealth Management and was chief executive and director of equity research at FusionIQ, a quantitative research firm. He blogs at the Big Picture and is the author of “Bailout Nation: How Greed and Easy Money Corrupted Wall Street and Shook the World Economy.”
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Source: Yardeni Research, Inc.

In this morning's discussion about defining bubbles, a reader made an interesting a posteriori statement: You can tell a bubble after a market has "dived much lower."

That sent me hunting for some data as to how often markets actually dive. This table is the result of that quick hunt: Dr. Ed Yardeni's discussion of "S&P 500 Bear Markets & Corrections." It turns out that these sorts of events are more common than one might have imagined. Defining a correction as a 10 percent or greater drop and a bear market as a 20 percent or worse fall, Yardeni identified 25 such "dives" since 1960. It is interesting to note that we seem to average one of these events (correction or bear market) about every two years.

As to dives -- if we make the cut off 30 percent or worse, then we get five examples since 1960: the end of the post-World War II secular bull market in 1968 (36 percent); the 1973 oil-crisis-induced recession and crash (48 percent); the 1987 crash (33 percent); the 2000 dot-com crash (49 percent); and the financial crisis of 2007 (57 percent). Only the last two appear to be bubbles in tech and credit.

I am not sure exactly what to make of these, other than to say that diving markets in and of themselves are not necessarily evidence of a prior bubble.

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