Oh, how things can change. A few months ago, the benchmark S&P 500 seemed unbreakable and was still hitting new all-time highs. But since peaking on Feb. 19, the index has pulled back, even briefly closing at more than 10% below its high mark, putting it firmly in correction territory.
Weak economic data and concerns over President Donald Trump’s far-reaching tariffs have sent the index into a correction once again. Investors and companies are scrambling for clarity as to what comes next.
Will the market continue to tumble, or have investors seen the worst of it? Luckily, history can offer an answer. Let’s take a look.
Investors have been here before
In the midst of a steep sell-off, it can be easy to panic, but the reality is that market corrections are quite common. According to a recent report from Deutsche Bank, the stock market has experienced 60 corrections (defined as when the market drops 10% from a 52-week high) since 1928. The corrections are considered to have ended when the market doesn’t fall another 10% within the next 30 trading days.
Deutsche Bank found that 44% of the time, these corrections happened around a recession. Roughly 12% of the time, the corrections occurred during a recession, while 32% of the time, a recession followed within the next year. However, the remaining 56% of these corrections were not associated with a recession at all. Seventeen of the 60 corrections that Deutsche Bank looked at evolved into full-blown bear markets, where the S&P 500 falls at least 20% from its most recent all-time high. But the majority of the corrections, 42 to be exact, ended with the stock market down somewhere between 10% and 20%.
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Carson Group’s Chief Markets Strategist Ryan Detrick looked at the stock market’s 48 corrections since World War II. Detrick found that only 12 evolved into a full-blown bear market. That pretty much aligns with what Deutsche Bank found. “Maybe we go into a correction, but we do not see a bear market coming,” Detrick told Yahoo! Finance recently. “Early in the post-election year, choppiness is normal and that’s kind of what’s happening.”
Brian Belski, chief investment strategist at BMO Capital Markets, also thinks the likelihood of a full-blown bear market is low right now due to the speed of the recent correction. “These types of corrections that happen this fast go right back up and recover just as fast, if not more,” said Belski, according to Yahoo! Finance. “In terms of fundamentals, they’re still flashing green, not yellow, not red.” Belski has a 6,700 price target on the S&P 500.
No time to panic
As the data shows, a correction does not mean a bear market is imminent. In fact, three of every four corrections does not lead to a bear market. That information should help investors remain calm.
That said, there’s still a lot of uncertainty out there regarding Trump’s tariffs and the direction of the economy. However, the market’s elevated valuations at the start of the year have played a part in the recent volatility too. When valuations are high, the margin for error is slim. It doesn’t take much to tip the market downward.
So, while the near-term outlook is still murky, investors should remain patient and avoid rash decision-making. They should also take this time to reevaluate their holdings and gauge their preparedness in case of an actual bear market or recession.
Bram Berkowitz has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
