Is a Correction the Next Stop for SPY?
While corrections are an inevitable part of investing, they often come without much warning.
It’s been nearly 16 months since the SPDR S&P 500 ETF (SPY) last entered correction territory.
That was back in late 2023, when the stock market was still clawing out of a bear market driven by rising interest rates that had sent the S&P 500 tumbling as much as 25% in 2022.
Corrections can happen fast and without much warning. On Feb. 19, SPY hit a fresh record high. Just six trading days later, it was already down 4.6%, putting the exchange-traded fund halfway to a correction. It’s a reminder that markets can turn sharply, even when investor sentiment is strong.
By definition, a correction is a market decline of 10% or more from recent highs, while a 20% drop is the widely accepted threshold for a bear market. These pullbacks are a normal part of market cycles, but they can still feel unsettling when they happen.
Historically, corrections occur fairly regularly. Since 1928, there have been 56 market sell-offs of 10% or more, according to Yardeni Research. On average, corrections happen every 16 to 24 months, which is why some investors believe the market is overdue for one.
But averages can be misleading—markets don’t follow a set schedule, and long stretches without corrections happen.
Take the 1990s, for example. Believe it or not, the S&P 500 went nearly seven years without a correction, but there were a few close calls.
In 1994—four years after the previous correction—the index had a drawdown of about 9%. In 1996, it fell nearly 8%. And in early 1997, it dropped 9.6%. But it wasn’t until later that year that the index finally breached the 10% threshold, capping a remarkable stretch without a correction.
That period was unique, driven by a surge in tech stocks that eventually culminated in a full-blown bubble. While it’s unlikely to be repeated in exactly the same way, history has shown that markets can sometimes defy expectations for extended periods.
So, what’s the takeaway? While corrections are inevitable, timing is unpredictable. Investors should always be prepared for volatility and take care not to assume that just because a correction is "due," it will happen right away.
The market has a way of surprising even the most seasoned investors.
