This statistic shows: The stock crash may have just begun | news

The question of all questions about stocks at the moment is: How long will the stock price crash last? A seemingly simple question, but one that is almost impossible to answer due to the nature of the stock market.

However, a look into the past and key figures could give us a sense of what lies ahead for equity and ETF investors. And show why the duration of the crash is not the deciding factor in the end.

How long does an average crash last?

Downtrends in equities are usually divided into corrections and bear markets. A withdrawal is considered a correction as soon as the price of the respective stock index is at least 10% below its last peak. A downward movement of at least 20% is called a bear market.

Over the past 90 years, the average US stock market correction lasted 114 days, sending prices down 14%. The current downward movement has been running for 128 days. During this time, the US stock index S&P 500 fell by about 17% (as of May 16, 2022). So there is not a long way to go before we are in the territory of the bear market.

And this is where the statistics look much uglier. The average bear market lasted 343 days and sent prices down around 37%. After all, if you look at all types of setbacks together, the average for 186 days was only 21% down.

Are shares now again priced cheap?

The current crash is primarily driven by growth stocks. Value stocks hold up well in comparison. As a result, the valuations of both stock groups have converged significantly.

At present, the ratio between price and earnings (P / E) for value shares in S&P 500 is 15.6 – a figure corresponding to where it started the year. US growth stocks have a P / E ratio of 22.4, but saw a marked drop in valuation: At the beginning of the year, their average P / E ratio was just below 30.

Are growth stocks now reasonably valued again? The answer may be the price-earnings-growth (PEG) ratio, which compares P / E with expected earnings growth. Growth equities were well ahead of value equities here last year, but the values ​​have now converged markedly and are 1.28 (growth) and 1.16 (value), respectively.

This means that if the crash continues as before, growth stocks may soon be cheaper than value stocks. However, this does not guarantee an end to the downward movement. Overall, stock valuations still have room to fall, given that the P / E ratios for both groups of stocks were around 10 at the low point of the financial crisis.

Use the crash and get rich

Some economists see the danger of the economies of Europe, the United States and China slipping into a downturn at the same time. I do not think I need to tell you that this is bad news for stocks.

But in the long run, the economy has recovered from any crisis and the stock markets have come back stronger and stronger. When the company’s valuations fall to very low levels, that does not mean that stocks are a bad investment now. On the contrary: you could then buy stocks at particularly low prices and enjoy the next recovery.

In the end, it does not matter how long the breakdown in stocks lasts. Much more important is how to use the crash correctly.

The article These Stats Show: The Stock Crash May Have Just Begun was first published on The Motley Fool Germany.

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