It took just 16 trading sessions for US stocks to tumble into a correction, leaving a frazzled Wall Street asking just how long the “adjustment period” White House officials have warned about will last.
History is an imperfect guide, especially when President Donald Trump’s trade policies threaten to upend the 80-year post-war world economic order, but it may offer some clues for investors.
In the prior 24 instances when stocks have fallen at least 10% from a record but avoided a bear market, it has taken an average of eight months to reclaim an all-time high, according to data from CFRA Research. That would leave the Feb. 19 high intact until mid-October. The average drawdown reached 14% in those cases.
Of course, no two corrections are alike, and there’s no guarantee this one will avoid extending into a bear market. Predicting a likely path for stocks from here is less an exercise in market history than it is in assessing the impact of inconsistent economic policies on growth and profits.
To Doug Ramsey, chief investment officer of The Leuthold Group LLC, the pain for the market may just be getting started, even if there is a short-term rebound. His reasoning is that the sharp pullback may hamper economic growth as wealthier Americans potentially curb spending.
“We are looking at this correction as the first leg down of a cyclical bear market,” Ramsey said. “So we are not working too hard on visualizing what a recovery might look like.”
The S&P 500 Index was up more than 1% early in the session, offering a reprieve from a three-week selloff that delivered the seventh-fastest 10% drawdown on record. However, it’s still down roughly 3% over the past five sessions after losing 3.1% last week.
The last leg lower came after Trump ramped up his trade spat with American’s largest trading partners, renewed a promise of mass deportation and pressed his campaign to fire tens of thousands federal workers.
Together, the policies threaten to upend a resilient labor market and add to pressure on price increases at a time when economic data is showing signs of weakening.
“The length and depth of any selloff is closely related to the question of whether an economic downturn or recession is on the horizon,” said Ross Mayfield, investment strategist at Baird Private Wealth Management. “Plenty of 10-15% selloffs have snapped back quickly if economic weakness is limited, or if there is a policy ‘put’ to stop a market free-fall, either from the federal government or the Federal Reserve.”
Bank of America Corp.’s Michael Hartnett on Friday predicted the rapid drop in US stocks is likely to prompt policy intervention from Trump as well as Fed officials to stem the declines. So far, however, the president and his advisers have given bulls scant reason to expect a change, especially when it comes to trade. Reciprocal tariffs on all nations America trades with are due April 2, which economists warn will lead to price pressures.
The central bank will deliver its latest policy decision Wednesday, with investors pricing in no chance for a rate cut.
Mayfield said economic deterioration remains limited and policy uncertainty could be rectified quickly, but if tariff uncertainty lingers enough to weigh down consumer and business confidence the selloff could be deeper and longer.
Getting right the call on a recession can be the difference between garden-variety losses and a rout. Since 1965, non-recession corrections average a 16% drawdown and recession selloffs average a 36% drawdown, according to data compiled by Baird.
The S&P 500 has erased roughly $5 trillion in market capitalization since its Feb. 19 peak.
Uncertainty around the toll of tariffs on economic and corporate growth and the outlook for inflation have pummeled what has been the best two year stretch for the stock market since the dot-com boom of the late 1990s.
Now traders are wondering how much worse things could get. The S&P 500 fell 25% from peak to trough in 2022’s bear market. If the same were to happen this year, that would place the gauge around the 4,700 level. It closed Thursday at 5,521.
“If we are going to remain in this on-again, off-again tariff environment, that’s going to keep businesses blindfolded,” said Kevin Gordon, senior investment strategist at Charles Schwab & Co. “Plus, all of the bearishness that has crept into the market has been purely attitudinal and you need that behavioral washout phase for the market to be in a better position for a rally.”
Wall Street firms have also begun to dial back sentiment, as a recovery becomes more elusive. Strategists at Goldman Sachs Group Inc. downwardly revised their S&P 500 forecast, adjusting for losses over the past three weeks. Even outspoken bull Ed Yardeni cut his expectations for the gauge by roughly 9%, going as far as to warn the risk of stagflation from tariffs has increased.
Stocks have rarely been this oversold. The S&P 500’s relative strength index is sitting at 27, a level below that was seen less than 1% of the time this century. While Leuthold Group’s Ramsey called this the first leg of a bear market, he also concluded that the sharp risk-off direction could be a bottom.
“The market is certainly down enough that a multi-percentage point rally could start at any time,” he said.
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