S&P 500 Falls into Correction Territory as Trump’s Trade War Escalates: What History Suggests Could Happen Next

The S&P 500 index officially entered correction territory on Thursday, marking a swift and notable decline that has raised concerns among investors about a potential global economic slowdown. Closing at 5,521.52, the index dropped 1.4%, which translates to more than 10% below its recent peak of 6,144.15, reached on February 19. This rapid decline signifies the fastest peak-to-correction drop since the turbulent days at the onset of the COVID-19 pandemic in March 2020, taking just 16 trading days to reach this correction.

As stocks continue to grapple with price volatility, fueled predominantly by escalating trade tensions under the Trump administration, investors are closely analyzing the historical performance of the S&P 500 following such corrections for insights into potential recovery trajectories.

Historical Performance After Corrections

A review of historical data since 2008 reveals that stock performance after the S&P 500 enters correction territory tends to fluctuate. In the 30 days following a first close in correction territory, the index has, on average, registered a negative return of 1.7%. However, when looking at longer timeframes, a more positive outlook emerges, with the S&P 500 typically gaining an average of 2.1% over the subsequent three months and nearly 5% over six months thereafter.

Furthermore, when extending the timeline to a full year, the S&P 500 has recorded an impressive average advance of 15.3% following the initial breach of the correction threshold, suggesting that historical trends point towards a potential recovery over time.

Driving Factors Behind the Decline

The recent sharp downturn in the stock market has been significantly influenced by President Donald Trump’s aggressive stance on trade, particularly in regard to tariffs. The President recently described the European Union as a “hostile and abusive taxing and tariffing authority,” threatening to impose a 200% tariff on alcohol imported from EU countries. Additionally, ongoing trade skirmishes with Canada, including proposed tariffs of 25% on all goods, are contributing to elevated uncertainty in financial markets.

As the trade war escalates, the uncertainty surrounding tariffs—both proposed and retaliatory—has prompted a risk-off sentiment among investors, which has been reflected in the broader market’s downward trajectory in recent weeks.

Market Reactions and Investor Sentiment

U.S. Treasury Secretary Scott Bessent recently reassured investors during a CNBC interview, advising them to maintain a long-term perspective despite recent market volatility. Bessent stated that he does not perceive any immediate threat of a recession resulting from ongoing tariff concerns.

Adam Turnquist, chief technical strategist at LPL Financial, noted that while the rapid drop in equities has been painful, static data shows that the current drawdown is not unusual. Since 1950, it is noted that 92% of trading days have experienced some degree of drawdown from recent peaks. Common declines of less than 5% occur around 40% of those trading days, while pullbacks of 5% to 15% have happened in over 25% of all trading days, framing the current 10% drawdown as fairly standard.

Looking Ahead: Weighing Risks and Opportunities

Despite the potential historical rebound after corrections indicated by historical data, analysts caution about the current market conditions. Increased volatility, concerns about institutional participation, and defensive rotational pressures contribute to a cautious outlook for potential buyers. As market participants weigh their options, a careful examination of the evolving trade landscape, alongside broader economic indicators, will be essential in guiding future investment strategies.

In conclusion, as the S&P 500 has officially entered correction territory, history suggests a mixed bag of immediate challenges versus long-term recovery potentials. With the global trade landscape continuing to shift under Trump’s policies, investors will have to remain vigilant and adapt to the uncertainties, balancing risk with the potential for future gains.