Corrections in equity markets
March 25, 2025
Topic of the week:
On March 13, the most relevant U.S. equity index, the S&P 500, completed a market correction. By definition, a market correction is a fall in a given benchmark index of between -10% and -20% from its recent high. From a -20% decline onwards it is considered a bear market. A few days ago, the most important global benchmark index fell by -10.1% from its most recent high on February 19. Practically half of the contribution of this fall comes from the poor performance of the 7 companies with the largest market capitalization in the US (the so-called MAG7), which in turn were the main catalyst for profitability over the last two years due to the weight they have been acquiring over time. Although it is true that today the S&P 500 has recovered slightly and the fall from its highs is less than -10%, part of the market is still concerned.
When these declines occur, nervousness increases, and some investors begin to doubt their investment strategy. Although it may seem extraordinary and uncommon, the reality is that a drop over the course of a calendar year of at least -10% is quite common. However, neither in 2023 nor in 2024 did we experience market corrections in the U.S. index, being two extraordinarily positive years with returns in excess of 20%. In fact, 2024 has been unusual, being the period with the lowest market volatility in equities in the last 35 years.
Since March 2009 following the financial crisis there have been 10 corrections in the S&P500 of at least a -10% decline, of which 4 have been greater than -20% and only one has been greater than -30% during the Coronavirus in 2020. On many occasions, market corrections do not translate into calendar year declines. That is why it is so important not to make moves to try to anticipate the market (market timing) and remain invested as long as the portfolio is well constructed and aligned with each investor’s risk tolerance. We would like to share a chart extracted from the latest JPMorgan market guide with the year-on-year declines of the S&P500 versus annual returns since 1980.
It is significant that in the US, despite average intra-annual declines of -14.1% over the last 45 years, annual returns were positive in 34 years. One example was precisely in 2020, with intra-annual declines of more than -30% but ending the year with returns above 10%. Something similar occurs in Europe, with similar conclusions in the MSCI Europe index.
If we analyze a longer period, according to Carson Investment Research since 1928 there have been some 60 market corrections (including this last one in March 2025) and only on 12 occasions did the S&P 500 end the year with declines of -10% or more, the last one being in 2022. In all cases there were very significant incidents that accounted for these declines (Great Depression, World War II, severe recessions, technology bubble, global financial crisis, major Fed monetary policy errors or inflation crisis).
When there is a significant market downturn, how do we know if a correction is going to stay there and reverse quickly or if it is going to turn into a recession and extend for months or even years? The answer is that no one knows for sure. What is a fact is that market corrections in equities are common if we look at long investment periods. To paraphrase the successful investor Peter Lynch: “Market corrections and declines are the price we pay for long-term returns”. Finally, from the lows of the global financial crisis in March 2009 until today, where we have already mentioned that the S&P 500 index has suffered up to 10 corrections of -10% or more, the S&P500 has appreciated by more than 700% in 16 years, or in other words, a compound annualized return of 14%.