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Wednesday, March 19, 2025

Navigating Corrections and Bear Markets in the SPX500 Index

By Century Financial in 'Investment Insights'

Navigating Corrections and Bear Markets in the...
Navigating Corrections and Bear Markets in the SPX500 Index

In Layman’s Terms

  • By March 13, the US 500 index closed lower by more than 10% from its February 19 peak – entering correction territory in a span of just 16 days.
  • Since 2000, the US 500 has experienced nine corrections, with an average loss of 14% over 83 days. Recovery took an average of 86 days, with a 9% return in one month, 20% in six months, 26% in one year, and 72% over five years.
  • Since 2000, the US 500 experienced four bear markets, averaging a 41% loss over 440 days. Recovery took 435 days on average, with returns of 18% in one month, 32% in six months, 49% in one year, and 121% in five years.

U.S. President Donald Trump has created quite a stir in the markets with his aggressive tariff policies on imports. At times, Trump leveraged the threat of tariffs as a negotiation tactic by pausing duties on imports, while in other cases, he fully committed, signalling his readiness to endure short-term market pain for long-term gains. In both cases – the impact was widespread as it stoked concerns about global trade wars and a subsequent economic downturn. As a result, major U.S. indices experienced a sharp correction in a relatively short time. The US 500 index, which was trading at a record high of $6,147.43 on February 19, entered correction territory in just 16 days as it slumped over 10%. This represents the quickest transition from peak to correction since the six-session drop at the onset of the COVID-19 pandemic in March 2020.

The recent selloff has presented a compelling opportunity for investors to enter a handful of carefully selected stocks with lucrative potential. The table below encompasses a list of high-quality stocks from various sectors in the US 500 Index that have experienced notable pullbacks. sectors that have experienced notable pullbacks. These stocks are backed by strong fundamentals, with consensus ratings above 4.5 and over 80% of analysts recommending a "Buy." Consensus analyst target prices suggest potential gains ranging from 16% to 82%.

* Last Price reflects the closing price as of 14 March 2025. | Source: Bloomberg
Note: In the event of a bear market, these high-quality stocks with strong and attractive business models and economic moats appear attractive to add to a portfolio at lower prices.

 

Historical Analysis of Corrections and Bear Markets

 

A correction is a market drop of 10% or more from its peak, whereas a bear market is a more significant decline of 20% or higher. Corrections are far more common than bear markets and are much swifter and more evident. Bear markets take a while to pan out and are not as apparent over the very short term. Since 1929, the US 500 index has endured a correction 56 times, of which 22 instances escalated into a bear market.

The table below provides a glimpse into the duration of past corrections – highlighting the time taken for recovery and the average return over different time periods. Since 2000, the US 500 has experienced nine corrections, with an average loss of 14% over 83 days. Recovery took an average of 86 days, with a 9% return in one month, 20% in six months, 26% in one year, and 72% over five years.


Source: Bloomberg

 

The nature of the ongoing decline suggests it is more likely a correction. However, it has the potential to morph into a full-blown bear market if Trump’s sweeping tariffs trigger an economic slowdown. Nevertheless, precedents from the last five bear markets and their subsequent recoveries provide a strong foundation to position portfolios strategically during this phase.

The table below provides a glimpse into the duration of past bear markets – highlighting the time taken for recovery and the average return over different time periods. Since 2000, the US 500 experienced four bear markets, averaging a 41% loss over 440 days. Recovery took 435 days on average returns of 18% in one month, 32% in six months, 49% in one year, and 121% in five years.


 

Source: Bloomberg

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