The market can remain irrational a lot longer than investors can remain solvent.

That’s one of the primary rules of investing.

And when the market becomes unhinged – like it has recently – it’s easy to give in to panic. It’s easy to want to rush in and try to catch a falling knife.

During Monday’s session, circuit breakers were triggered on the Dow Jones Industrial Average, Nasdaq and S&P 500 in the premarket and open sessions.

It was the worst day for investors since August 2011. Crude oil prices tumbled more than 20% as Russia and Saudi Arabia engaged in a price war.

The intense Bloody Monday sell-off added to the broader market’s woes for 2020.

All three major indexes are deep in the red year to date. And intraday, the Nasdaq pierced the bear market threshold – down 20% from its high – on Monday.

So what’s next?

How much worse is it going to get? When does the selling end?

In part, that depends on how we view Monday’s action.

Was it the end of the bull market that’s been running for more than a decade? Or was it just a final black eye in a bruising correction?

Because these two scenarios offer two very different playbooks for investors.

The 2020 Correction

It’s hard to believe, but it hasn’t even been a month since the current correction began.

Sell-offs feel almost infinite.

Prior to this year, the S&P 500 had survived 26 corrections of 10% or more since World War II.

That averages out to roughly one every 2.8 years.

They’re a vital piece of the market’s healthy ebbs and flows.

But the volatility has been persistent during the last few years. In fact, the last two corrections we saw were both in 2018.

Historically, the S&P has lost an average of 13.7% over a four-month span during these 26 corrections.

Then the markets have taken four months to recover.

For example, in our last correction, the S&P lost 19.94% from September 21 to December 24, 2018. It didn’t completely recover all of those lost points until April 23, 2019 – almost exactly four months later.

So investors who bought at the highs in September 2018 waited nine months to break even.

Let’s say yesterday’s low of 2,752.33 on the S&P was the end of our current correction. That means we wouldn’t expect to see new highs on the index until late June or July.

Of course, there are a lot of great companies trading at deep discounts now. These can deliver massive gains during that stretch.

But what if this is the beginning of something worse? What if this is the dreaded bear market investors have been fretting since at least 2010?

A Bear Attack?

Over the past 75 years, the markets have battled their way back from the depths of a dozen bear markets.

On average, the steep declines resulted in losses of more than 32.5% over a period of 14.5 months.

Even worse, they’ve taken more than two years to recover from.

Most of us remember our last market implosion – the Great Recession sell-off that ran from October 8, 2007, to March 3, 2009.

During that stretch, the S&P shed more than 56% of its value. It was a brutal, devastating period that scarred generations of investors.

And the S&P didn’t recover all those points lost until March 2013. That’s four years later!

Not to mention, during that recovery, the S&P suffered multiple corrections of more than 10%.

Now, if this is the 13th bear market since World War II, statistically, we’d be only halfway through our losses. That means there’s more bloodshed to come.

But I don’t think that’s the barrel of the particular gun we’re looking down.

There’s no denying we’re in a tumultuous, volatile market.

We’ve had the fastest 10% correction in history, followed by the two largest single-day point gains ever, followed by the worst day of trading since the financial crisis.

The market is sick and unstable. That much is evident. And every time it feels like it’s found its feet, a new rock is tossed in its path (like the cratering of crude oil).

I think it’s too early to declare this old, gray bull market dead just yet.

Since the longest bull run in history began in March 2009, we’ve suffered seven corrections of 10% or more. That’s a quarter of all the corrections the S&P has experienced since World War II. Making us veterans of volatility.

We should continue to look for spots to start adding quality companies at discounted prices.

But be patient. There’s plenty on sale right now. And it’s hard to judge when the irrationality will end.

Here’s to high returns,

Matthew