By Lisa Schreiber
Market corrections are defined as instances when stock indexes, like the S&P 500 or NASDAQ, fall more than 10% from their most recent high. Correction talk took center stage in early March as both the NASDAQ and the S&P 500 entered correction territory. While corrections always trigger fear and uncertainty, and can often feel painful as asset levels decline, they also serve as a function to reset valuations and can often present potential buying opportunities. Let us take a closer look at why corrections occur and what we can learn from history.
A market correction can feel unsettling, especially when headlines amplify fears of a deeper downturn along with predictions of a pending “crash.” History shows that corrections are a natural part of market cycles and are more the norm as an exception.[1] As seen in the chart below,[2] investors typically face some form of downturn every single year, even in years with strong annual returns. While no corrections are perfectly alike, they all
tend to be temporary and can pave the way for future market growth. Corrections can also provide opportunities for investors to add to their positions at more favorable prices – the well discussed but less frequently practiced “buy low and sell high.” Despite this most recent correction, the US equity market (measured by the S&P 500) remains up 47.8% since January 2023,[3] while the US bond market (measured by the US aggregate bond index) has gained 1.9% over the same period.[4] For long-term investors who have remained invested throughout this cycle, the overall trajectory remains positive.
As reflected in the chart below, it is much more frequent that corrections are short-lived and usually do not escalate into a bear market, defined as a decline of more than 20%. Since WWII, investors have faced 48 corrections of 10%, but only 12 have turned into a bear market.
Despite the favorable historical trends, the question still remains about whether this correction will devolve into a bear market. On average, bear markets occur every three years and are usually much shorter than bull market rallies. As seen in the chart below, while painful when they happen, bear markets typically only last about 11 months, as opposed to over four years for bull markets.[5]
To go from a correction to a bear market, we believe a more significant catalyst would likely be needed that creates greater uncertainty or puts future economic growth in question. Currently, the US economy remains relatively resilient with:
· Positive GDP growth trends[6]
· Low unemployment6
· Inflation gradually moving in the right direction6
· Strong corporate earnings outlook for 2025[7]
That said, risks remain – particularly around tariff uncertainty and potential economic slowdowns as a result. While a bear market is possible, history suggests there is a higher probability of a market rebound than an extended downturn.
Nevertheless, at Gradient Investments, the theme for 2025 is “Bring an umbrella.” It does not mean that stormy markets are inevitable, but it means your portfolio is better prepared for the potential of difficult times ahead. Investors can take several steps to navigate a potentially bumpier 2025, including:
· Reassess risk tolerance – does the risk in your portfolio match the level of risk necessary to achieve your objectives?
· Rebalance portfolios – given stock performance far exceeding bond performance since 2023, portfolios that have not been rebalanced can be taking on greater risk than necessary.
· Consider buffered strategies – Gradient’s Buffered Index portfolios can offer opportunities for various levels of downside protection levels while maintaining a level of upside participation if markets rally.
Market turbulence is a natural part of investing and while history may not repeat itself, it offers valuable insights and guidelines. Investors who stay disciplined and prepared are often rewarded in the long run.
[1] https://www.fidelity.com/learning-center/trading-investing/corrections
[2] FactSet as of 3/19/2025. Returns are based on price index only and do not include dividends. Intra-year drops refer to the largest market drops from a peak to a trough during the year. For illustrative purposes only.
3] FactSet as of 3/19/2025, The S&P 500 is represented by the iShares Core S&P 500 ETF (IVV)
[4] FactSet as of 3/19/2025, Aggregate Bonds represents the iShares Core US Aggregate Bond ETF (AGG)
[5] Yahoo Finance and St. Louis Fed. Daily returns from 4/28/1942 – 2/28/2025.
[6] https://www.nerdwallet.com/article/finance/state-of-the-economy
[7]https://advantage.factset.com/hubfs/Website/Resources%20Section/Research%20Desk/Earnings%20Insight/EarningsInsight_032025.pdf?hsCtaTracking=31d0f488-5c02-4193-b93b-f1708067f4fa%7Cb994622e-6b82-4c98-ad34-76c848088314
