It’s been a turbulent week on global stockmarkets as the impact of Trump’s tariffs and worries about a possible short term recession in the US have spooked investors. But is there more to come? In this analysis, John Plassard, senior investment specialist at Mirabaud Group, reminds us of history of the ups and downs of markets – and why portfolio diversification is key.
‘Rest assured’ that there will be many more consolidations this year. History tells us so!
The facts
The market’s love affair with technology mega-capitalisations has hit a brick wall. The Nasdaq plunged 4% on Monday, its worst day since 2022, wiping out more than $1tn in market value. The Magnificent 7 index collapsed by 5.4%, officially entering bear market territory.
Tesla was the hardest hit, falling 15% in a single session, taking its year-to-date losses to 45%, while Nvidia has lost $1tn in market cap in just two months.
Except for Meta, all the stocks in the Magnificent 7 have been in the red since 1 January.
As you know, over the weekend, Trump administration officials and Trump himself reported a slowdown in the economy, in stark contrast to campaign promises that tariffs would fund tax cuts without disrupting growth.
Investors, who were already abandoning technology stocks in favour of defensive equities because of galloping inflation and erratic trade policies, hit the panic button.
The ‘speculative’ sectors of the market have been caught in a whirlwind, with unprofitable technology stocks falling by 23% this year and on course for their worst quarter since 2022.
The question now is: is this a temporary correction or the start of a more significant change in market leadership?
What does history tell us, and how should we approach such phases?
- The beginning of multiple drops
The S&P 500 fell by 2.7% on Monday, the eighth daily decline of 1% or more this year, but only the first of more than 2% since 1 January 2025.
This may not ring a bell, but if we look at the data since 1928, the average year counts … 29 declines of this type! That leaves 26 to go – if we stick to the historical average.
In 2019, there were 15 drops of 1% or more, while in 2022, there were … 63 such sessions!
- Have we already experienced a ‘healthy’ correction?
While it is clear that the market cannot keep rising indefinitely, it is difficult to anticipate when a downturn is about to happen.
One of the reasons for this difficulty is that new peaks in the stock market tend to lead to other peaks, as we pointed out some time ago.
So, when can we expect a ‘healthy’ correction so that we can climb new summits afterwards?
Firstly, and it’s quite frustrating, no one can predict the timing or scale of stock market corrections. However, history can once again help us.
Secondly, investors focus mainly on crashes and bear markets because they make a lasting impression. However, these are rare, contrary to what you might think.
One way of answering the question of when the ‘healthy’ correction will come is to take out of the equation the huge falls and concentrate instead on corrections.
Here’s a look at the double-digit corrections since 1928 that did not reach bear market levels – i.e., down 20% or worse:
According to analyst Ben Carlson, there have been 33 corrections over the last 97 years. The average healthy correction was a loss of 13.8% and lasted an average of 116 days from peak to trough.
Most of these corrections gave the impression that they were going to turn into a bear market at the time. However, a ‘healthy’ correction is more likely than a crash most of the time.
- A little history
Bad markets happen during bad times, but short-term downtrends can also occur during long-term uptrends.
The 2010s were an excellent period for the S&P 500, but there were still four double-digit corrections.
The end of the 1990s was one of the best bull markets in history:
- 1995 : +37%
- 1996 : +23%
- 1997 : +33%
- 1998 : +28%
- 1999 : +21%
Despite these exceptional returns, there were three separate double-digit corrections over the five-year period.
The 1950s is the most underrated bull market of all time. The US stock market rose by almost 20% a year over the decade. There were four corrections during this period, as well as a small bear market towards the end of the decade.
So far, the S&P 500 has risen by around 70% overall – 13.5% annualised – in the 2020s, although we have had two bear markets.
Corrections during the presidential years
When we talk about market downturns, we need to remember that Trump has just returned to the White House.
Since 1833, the S&P 500 index has gained an average of 10.03% in the year of a presidential election – i.e., 2024.
On the other hand, in the first – i.e., 2025 – and second years following a presidential election, the average gains are … 6.15% and 6.94% respectively.
There are notable exceptions to positive returns in election years, such as 2008.
- Conclusion
As we’ve been saying for years, it’s important not to downplay cycles, be they economic, monetary, stock market or political. Preparing for the fact that corrections are an integral part of the stock market, in good times and bad, is part of the stock market’s ‘life’ cycle. A healthy correction in the coming weeks/months could be a good thing if it avoids an unhealthy correction later! To avoid excessive volatility in your portfolio, nothing beats the 3D of investing – diversification, diversification and diversification.
