Understanding Market Corrections and the Impact of Trade Policy

K. Brad Tedrick, CFA®, CFP®

The financial markets have entered correction territory as trade policy concerns create turbulence, particularly affecting technology shares. The recurring nature of these market swings may leave investors feeling trapped in a cycle of uncertainty. However, maintaining a long-term perspective is crucial during these challenging periods.

Market cycles, like natural seasons, include both growth phases and contractions. While market downturns can feel prolonged and uncomfortable, historical patterns show they eventually stabilize and lead to new periods of expansion. Though current trade tensions present unique challenges, past experience suggests markets typically find their footing once uncertainty diminishes.

Historical data shows market corrections are temporary setbacks in long-term growth

Currently, we’re seeing the S&P 500 approach correction levels, traditionally defined as a 10% decline from recent highs, while the Nasdaq has remained in correction territory for about a month. 1 Recent weeks have witnessed significant market volatility, with major indices experiencing daily fluctuations of one to two percentage points.

A common market observation notes that prices tend to rise gradually but fall sharply. This pattern reflects how bull markets typically develop slowly through steady gains, while negative events often trigger rapid selloffs, as witnessed this year. However, it’s worth noting that even after corrections, market levels tend to establish higher floors than previous cycles. This creates a pattern of gradual upward progress punctuated by periodic setbacks.

This context is particularly relevant now, as the current S&P 500 correction is measured against February’s record high. From a broader perspective, the market has only retreated to levels seen last September. This helps frame recent volatility in a more balanced light.

The chart illustrates that market corrections are regular occurrences, averaging 14.3% since World War II. Despite their frequency, markets have historically recovered within months, often rebounding when sentiment appears bleakest. Recent examples include the recoveries following the pandemic in mid-2020, after the technology-driven bear market in late 2022, during the banking sector stress in early 2023, and numerous other instances.

Market timing strategies often lead to suboptimal investment outcomes

Market volatility often tempts investors to attempt timing their entry and exit points, seeking safety during downturns. However, this approach frequently proves counterproductive, as investors commonly miss the initial stages of recovery. Similarly, waiting for clear signs of market improvement can diminish long-term returns. The accompanying chart demonstrates how missing the market’s best and worst days over 25 years affects overall returns.

While avoiding market downturns might seem appealing, accurately predicting market movements proves extremely challenging. Even with perfect timing of extreme market days, the results only marginally exceed those of maintaining consistent market exposure. Given that most investors react to events after they occur, historical evidence suggests maintaining a long-term focus typically yields better results than attempting to time market movements.

Trade policy impacts on markets and sector performance

The market continues to process various potential outcomes from current trade policies. These measures often serve as negotiating tools across multiple policy areas, including immigration. Consumer sentiment and inflation expectations have already shown sensitivity to potential price increases. A significant escalation, particularly if met with reciprocal measures from trading partners, could impact global economic growth.

The full economic implications of trade policies typically emerge gradually. It requires multiple quarters to evaluate how businesses adjust supply chains, whether they absorb or pass along costs, and how trade partners implement countermeasures.

Technology stocks, which previously led market gains, have experienced the sharpest recent declines, as shown in the chart. The Magnificent 7 stocks’ recent performance should be viewed within the context of their substantial gains over the full market cycle. These significant fluctuations exemplify the higher volatility characteristics often associated with certain market segments.

Meanwhile, several sectors including Energy, Healthcare, Utilities, and Financials have demonstrated relative resilience. Eight of eleven S&P 500 sectors maintain positive returns over the past year despite recent volatility. This highlights the value of diversification across market segments and maintaining balanced portfolios aligned with long-term financial objectives.

The bottom line? While trade policy uncertainty has increased market volatility, particularly affecting technology stocks, historical evidence supports maintaining a long-term investment focus to achieve financial objectives.

 

¹S&P 500 declined 9.2% between February 19, 2025 and March 28, 2025. The Nasdaq fell 14.1%, between December 16, 2024 and March 28, 2025