Stocks got hammered Wednesday. And, unfortunately, we'll only know in hindsight if this is the beginning of a bear market or a major market crash.
However, now's as good a time as any to remember that big stock market sell-offs happen all of the time, even during extended, multi-year bull markets.
In a post on J.P. Morgan Asset Management's Insights blog, James Liu and Abigail Dwyer share a chart showing market downturns since the 1920s. It specifically illustrates the percentage drop in the S&P 500 index from the most recent market high. They noted that most of the ten major corrections of at least 20% over that time period were associated with factors external to the stock market, like wars, recessions, and monetary policy shifts:
Liu and Dwyer argue that major downturns in the market don't just happen because prices are too high.
"History suggests that bear markets more often result from factors external to the stock market, such as recessions, wars and credit bubbles,"
They argue that the fundamentals of the economy are favorable for stocks:
"Unlike the circumstances that precipitated previous crashes, the current economic backdrop is strong and poised to continue strengthening. U.S. economic growth is steady and the labor market is improving at an accelerating pace. Corporations are healthy and are finally putting cash to work. Consumers are more confident today than even just a year ago, as household net worth rises and gasoline prices fall, but they are not euphoric by any means. Investor sentiment is also rising, but is still below the levels of irrational exuberance seen during the tech boom."
But this is no reason to get complacent.
"One legitimate concern, however, is the unprecedented degree of central bank intervention," the analysts wrote. "We are indeed in uncharted waters and the long-run consequences of worldwide excess liquidity are uncertain."