S&P 500 Falls Into Correction Territory as Trump's Trade War Escalates: Here's What History Says Could Happen Next
The S&P 500 Index officially entered correction territory on Thursday, marking a swift 10% decline from its recent high. This decline was driven by escalating global trade tensions, particularly due to President Donald Trump'saggressive tariff policies.
Quick Fall Into Correction
The S&P 500 fell 1.4% on Thursday, closing at 5,521.52. This drop pushed the index more than 10% below its recent peak of 6,144.15, which was reached on February 19. The correction took only 16 trading days, making it the fastest peak-to-correction decline since the onset of the COVID-19 pandemic in March 2020.
What History Tells Us
Historically, the market tends to experience some turbulence after entering correction territory:
- In the first month after a correction, the S&P 500 typically shows an average negative return of 1.7%.
- However, stocks tend to recover over longer periods:
- 2.1% average gain over the next three months.
- Nearly 5% gain over the next six months.
Looking back to 2008, the index posted a 15.3% average advance one year after entering correction territory.
Trade Tensions Drive Market Volatility
The U.S. stock market sell-off was fueled by President Trump's escalating trade war. On Thursday, Trump targeted the European Union (EU), calling it a “hostile and abusive taxing and tariffing authority” and threatened a 200% tariff on alcohol imports from EU countries. Additionally, Canada has retaliated with its own tariffs on U.S. goods.
The ongoing uncertainty around Trump’s tariff plans and retaliatory measures from global trading partners have led to increased market volatility, with concerns of an economic slowdown.
The Historical Context of Drawdowns
Despite the recent sharp decline, such drawdowns are not unusual in market history. Since 1950, the S&P 500 has experienced some form of drawdown on 92% of trading days. More notably:
- Declines of less than 5% have been the most common, occurring 40% of the time.
- Drawdowns of between 5% and 15% from recent highs have occurred in over 25% of trading days, making the current 10% decline relatively common.
Adam Turnquist, chief technical strategist at LPL Financial, noted that while the market has dipped sharply, such declines often lead to oversold conditions, and signs are emerging that the market is nearing washed-out territory.
However, Turnquist cautioned against buying the dip due to long-term breadth damage, lack of institutional participation, and defensive rotational pressures.
What’s Next for U.S. Stocks?
While the Nasdaq Composite Index and Dow Jones Industrial Average also finished lower on Thursday, market participants remain uncertain about the future direction of stocks. U.S. Treasury Secretary Scott Bessent sought to reassure investors by downplaying the likelihood of a recession, but the current situation is still causing considerable market unease.
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