A stock market correction is usually defined as a decline of 10% or more from a recent peak in major indices like the S&P 500. Over the years, declines like these have occurred with regularity, rectifying soaring valuations and tempering speculative excesses. On March 13, 2025, the market entered its first correction since 2023.
How Often and How Much?
Since the 1950s, the S&P 500 has gone through approximately 38 corrections … an average of one every 1.84 years. Let’s round it off to a correction roughly every two years. That’s one of the reasons we have been saying you shouldn’t be surprised we are going through one now. The average decline during these corrections has been around 14%, though individual corrections can vary in intensity.
Noteworthy Bear Markets Since the 1960s
- 1966: The S&P 500 declined by approximately 22% due to an economic slowdown and tightening monetary policy.
- 1973-1974: A significant bear market occurred, with the index dropping about 48%. This was influenced by the oil embargo and rising inflation.
- 1987: Known as “Black Monday,” the market plummeted over 20% in one day, marking one of the most rapid corrections in history.
- 2000-2002: The bursting of the dot-com bubble led to a nearly 37% decline in the S&P 500 over two years.
- 2007-2009: The global financial crisis resulted in a 57% drop, making it one of the most severe bear markets since the Great Depression.
- 2020: The onset of the COVID-19 pandemic caused a swift 34% decline. This was followed by an equally rapid recovery.
Current Context and Overdue Correction
After two years of extraordinary stock market returns (20%+ for the S&P 500 in both 2023 and 2024), we felt the markets were overdue for correction. Several factors contributed to our anticipation of a significant pullback:
- Extended Bull Market: Prolonged periods of market gains can lead to overvaluations, increasing the likelihood of a corrective phase.
- Economic Indicators: Signs of economic slowing often precede market corrections. At this time, we do not see a recession in the cards, but there have been some recent soft economic reports.
- Geopolitical Tensions: Global events, such as trade disputes or political instability, can trigger market volatility.
Implications for Investors
While corrections can be unsettling, they are a natural part of market cycles. Historically, the S&P 500 has gained an average of more than 8% one month after a market correction bottom and more than 24% one year later. This type of market resilience underscores the importance of maintaining a long-term investment perspective and not making impulsive decisions based on short-term market movements.