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.
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James J. McCombie has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
