The FTSE 100 is rising today, but it slumped in the prior three trading days and is about 3.3% below its most recent high. The UK’s main index did slip as low as 4% below this year’s high watermark on Monday. The speed of the decline – it happened in just a couple of days – sparked talk of a stock market crash. Over in the US, the talk of a stock market crash is even louder. The main US index, the S&P 500, is 9.5% off its most recent high, and briefly dipped below 10% yesterday. It has taken since early January for the S&P 500 to fall to its current level.
So, it might sound odd to be asking when the next stock market crash is coming. Surely I am sitting in the middle of one? The wider investing community seems to have settled on a market dropping 10% from a recent high as being in correction territory. So the S&P 500 entered correction territory yesterday, but the FTSE 100 did not. However, what makes a stock market crash different from a correction is speed. I would suggest that a stock market crash is a fall of at least 10% that occurs rapidly. But how rapidly? A 10% drop in days, perhaps up to a few weeks sounds about right.
Stock market corrections
Given that there is no well-defined consensus on how quickly a market needs to decline by a significant amount to make it a stock market crash, it is difficult to compile a list of crashes. There was of course the crash in 2020, caused by the coronavirus pandemic. Then there was the great financial crisis that inspired a crash in the late 2000s, and the dot.com bubble burst in the early 2000s. These crashes are not in doubt, but others are. But I argue that the speed of the decline is not all that important. What matters more is the magnitude. Thankfully, Charlie Bielo, an author at Compound Advisors, has crunched S&P 500 returns and produced useful data on the average frequency.
Table 1. How often can we expect stock market corrections of various magnitudes?
| S&P 500 Correction Magnitude | Average Frequency |
| -5% | 1.1 years |
| -10% | 1.6 years |
| -15% | 2.5 years |
| -20% | 4 years |
| -30% | 9 years |
Source: Charlie Bielo, Compound Advisors
A correction of 10% is expected about every one and a half years. A 15% correction every two and a half years, a 20% event every four years and a 30% correction every nine years. Now, a 10% correction as we have seen stirs up a lot of commentaries and indeed panic. I should expect to see such a correction after being in the markets for just 18 months or so.
When will the FTSE 100 crash?
I don’t know when the next FTSE 100 stock market crash will be. However, assuming the S&P 500 data is applicable, I should expect to see a significant correction in the FTSE 100 about every 1.6 years. If that correction is fast enough, then there will be talk of a stock market crash. The FTSE 100 fell under 5% recently and that generated a lot of panic, and those types of events happen every year or so. Thankfully, larger drops are rarer, but the longer I am in the markets the more likely it is I will experience one.
