Every so often, Wall Street sends a not-so-subtle reminder to professional and everyday investors alike that stocks don't move up in a straight line. Following a virtually uninterrupted rally that began in October 2022, the ageless Dow Jones Industrial Average (^DJI 0.95%), benchmark S&P 500 (^GSPC 1.33%), and growth-stock-dependent Nasdaq Composite (^IXIC 1.59%) have officially hit a rough patch.
Between the respective closing bells on Feb. 19 and March 26, the Dow Jones, S&P 500, and Nasdaq Composite have declined by 4.9%, 7%, and 10.8%, respectively. On a peak-to-trough basis, these indexes shed 8.6%, 10.1%, and 13.7% of their value from Feb. 19 through March 13. You'll note the double-digit percentage declines officially placed both the S&P 500 and Nasdaq Composite in correction territory.
Image source: Getty Images.
Even though declines of 10% are perfectly normal and healthy for the stock market, double-digit drops also tend to play on investors' emotions. In other words, it has some investors wondering if the latest stock market correction will turn into a full-fledged bear market, which is where one or more major indexes sheds at least 20% of its value.
While the short-term future can't be predicted with 100% accuracy, historical correlations can be a helpful guide.
Two factors have likely precipitated the stock market's elevator ride lower
Before digging into historical data and analyzing previous stock market corrections, it's important to understand the dynamics of what's behind the latest elevator move lower for the Dow, S&P 500, and Nasdaq. Though there are a number of factors that have played a role in weighing down equities over the previous five weeks, two catalysts stand out as having precipitated this decline.
First and foremost, Wall Street is clearly concerned about the implementation of President Donald Trump's tariffs. The stock market craves certainty, and it simply hasn't been getting it with the Trump administration altering tariff implementation dates and adjusting which goods are subject to added import taxes.
To build on this point, there's a history of poor stock performance that accompanies tariff announcement days. Based on a December analysis from Liberty Street Economics, public companies exposed to Trump's China tariffs in 2018-2019 whose stock performed poorly when these tariffs were announced also, on average, saw their profits, employment, sales, and labor productivity fall from 2019 to 2021.
Beyond tariff uncertainty, the other major factor pushing stocks lower is the historic priciness of Wall Street.
S&P 500 Shiller CAPE Ratio data by YCharts.
On March 26, the S&P 500's Shiller price-to-earnings (P/E) ratio -- which is also referred to as the cyclically adjusted P/E ratio (CAPE ratio) and takes into account average inflation-adjusted earnings over the last decade -- closed at 35.58. While this is down from a peak of 38.89 during the current bull market cycle, it's still more than double the 154-year average multiple of 17.22.
Since January 1871, there have been only six instances where the Shiller P/E ratio has surpassed 30 and held that level for at least two months, including the present. The former five occurrences were all, eventually, followed by declines in one or more of Wall Street's major stock indexes ranging from 20% to 89%.
In other words, premium valuations, as demonstrated by a high S&P 500 Shiller P/E, tend to be a harbinger of significant downside for stocks.
How often do stock market corrections turn into bear markets?
With some context as to what factors have been pushing the Dow Jones Industrial Average, S&P 500, and Nasdaq Composite markedly lower, let's address the question at hand: Will the latest stock market correction turn into a full-fledged bear market?
Though it's impossible to predict anything with 100% accuracy, 75 years' worth of historical data suggests that the probability of a bear market occurring is actually quite low.
13 of the previous 39 corrections turned into bear markets.
-- Ryan Detrick, CMT (@RyanDetrick) March 20, 2025
All bears start with a correction, but not all corrections turn into a bear market. pic.twitter.com/jyQYQTM9F5
Recently, Carson Group's chief market strategist, Ryan Detrick, used data provided by FactSet to closely examine every S&P 500 correction from the end of World War II in 1945 to the present day. This worked out to 39 separate events spanning close to 80 years where the widely followed index dipped by at least 10%.
In particular, Detrick's data plot points to 13 stock market corrections eventually turning into full-fledged bear markets. This means two-thirds of all stock market corrections will end between 10% and 19.9% below a recent high. Furthermore, there have been only six downturns over the last eight decades that have resulted in declines of at least 30% for the benchmark S&P 500.
But this isn't the only interesting correlation Detrick found between S&P 500 downturns and the likelihood of a bear market taking shape.
A little over two weeks ago, when the S&P 500 entered into official correction territory on March 13, Detrick published a dataset on social media platform X that examined the length of time between S&P 500 bear markets dating back to the start of 1950. He also examined the average timeline for three bear markets to take shape.
Another bear coming?
-- Ryan Detrick, CMT (@RyanDetrick) March 14, 2025
That would be three bears in 5 years, something we've never seen before. The previous closest three bears ever was 6.9 yrs between 1966 and 1973. pic.twitter.com/1VmKGK8tOy
As you'll note, S&P 500 bear markets occurred, on average, every 6.7 years. More importantly, the typical timeline needed to cover three S&P 500 bear markets is 13.7 years, with the shortest timeline for three bear markets over the previous 75 years clocking in at 6.9 years.
If the latest stock market correction were to turn into a bear market, it would do so with three 20%-plus declines occurring in a span of just five years, which has never happened before. This doesn't mean it can't happen -- but it does suggest that, statistically speaking, it's unlikely.
Time in the market continually trumps trying to time the market
If there's a core takeaway from eight decades' worth of stock market correction and bear market data for Wall Street's most widely followed stock index -- other than that history tends to rhyme on Wall Street -- it's that time in the market has consistently trumped trying to time its peaks and valleys.
As noted, corrections are a natural part of the investing cycle and the price investors pay for admission to the greatest long-term wealth creator. No amount of fiscal policy maneuvering or monetary policy changes can prevent news- and/or emotion-driven hiccups in the Dow Jones, S&P 500, and Nasdaq Composite from time to time.
But there's a night-and-day difference between boom-and-bust cycles for the stock market.
Image source: Getty Images.
A dataset published on X by Bespoke Investment Group in June 2023 compared the length of every bull and bear market in the S&P 500 dating back to the beginning of the Great Depression in September 1929. This dataset showed the average bear market decline lasted for 286 calendar days (about 9.5 months) spanning roughly 94 years. In comparison, the average bull market endured for 3.5 times as long -- 1,011 calendar days.
There was also a huge disparity when it came to extremes. Whereas only nine out of 27 S&P 500 bear markets lasted longer than a year, and none surpassed 630 calendar days, six bull markets endured for at least five years, and more than half (14 out of 27) of all bull markets have stuck around longer than the lengthiest bear market, if extrapolating the existing bull market to the present day.
Nothing is closer to a guarantee on Wall Street than allowing time to work its magic on your invested capital.
