History says correction-hit stocks will rally back strong. It just might take a few months.
Getty Images; Jenny Chang-Rodriguez/BI
- The S&P 500 recently hit correction territory on tariff fears and growth concerns.
- However, data shows the market ended higher a year after each correction since 1955.
- It takes four months on average for stocks to recover after a correction.
The S&P 500 tumbled into correction territory on Thursday, battered by fears over President Trump's trade war and weakening economic growth.
But the downturn doesn't mean that a bear market is at hand — if history is any guide, patient enough investors can gear up for fresh upside in the coming months.
Data from Covenant Wealth Advisors spotted by Axios on Monday morning found that stock market corrections — where an index drops 10% from its most recent high — typically take four months to recover from.
What's more, a look at the past 12 corrections since 1955 shows that the S&P 500 climbed significantly higher a year after entering a correction, averaging a 14.7% return over the next 12 months.
The data, compiled by Ryan Detrick, chief market strategist at the Carson Group, shows that five of these market corrections hit a bottom within a day.
Here is how the market fared in those instances over the next 12 months:
- 1955: +14.8%
- 1968: +13.7%
- 1990: +3.7%
- 1997: +21.5%
- 2018: +5%
The S&P 500 on Monday is up 2.6% in the two days since closing down 10% from its February 19 all-time high.
Though the benchmark index gained 25% in 2024 and hopes were high for the bull market to keep going, investor confidence has suffered amid rising economic jitters. The president's focus on a sweeping tariff agenda has sparked fresh inflation fears and growing talk of a recession.
By March 13, trillions were erased in market cap as the S&P 500 sank 10% from a late-February high of 6,144.
How the S&P 500 continues to move will matter. While correction territory isn't the end of the road for bullish investors, Covenant noted that a full-blown bear market decline of 20% comes with a longer recovery period. On average, previous bear market crashes took two years and two months for investors to see losses recouped.
Few expect this outcome. Though a string of investment banks have started downgrading year-end forecasts, new outlooks still imply that the index will climb, with the average S&P 500 target around 6,500.
Major banks have already suggested the worst may be over for markets, and Citi and Morgan Stanley said that the S&P 500 likely bottomed around 5,500 last week.