The Nasdaq Is on the Verge of a Correction. 4 Things Investors Need To Remember
The Nasdaq is nearing a correction as stocks fell due to rising oil prices, energy infrastructure damage in the Persian Gulf, and inflation concerns from the Fed. The S&P 500 dropped 1.9% and the Nasdaq 2.1% last week, with a close to correction territory. Corrections, occurring every 1-2 years, typically recover in about four months, and only 25% lead to bear markets. Historically, buying during corrections has proven beneficial for investors as major indexes tend to rebound.
Stocks slumped last week as rising oil prices, the destruction of energy infrastructure in the Persian Gulf region, and the Fed's acknowledgement of rising inflation risk combined to send the market tumbling.
By the end of the week, the S&P 500 was down 1.9%, while the Nasdaq Composite (^IXIC 2.01%) had lost 2.1%. Friday was particularly brutal, with the Nasdaq closing down 2%. At one point on Friday, the Nasdaq had fallen into correction territory, defined as a drop of 10% or more from a recent closing peak; however, a late rally was enough for it to escape .
Still, a correction seems likely at this point, at least barring a sudden change in the war in Iran. Here are a few things investors should know about the stock market and corrections.
Image source: Getty Images.
1. Corrections happen on average ever 1-2 years
A pullback of 10% or more might seem scary, but it's a relatively common event, happening every 1-2 years. Though it might seem like a distant memory, the market entered a deep correction less than a year ago, when stocks crashed around President Trump's "Liberation Day" tariffs announcement.
It only took months after that for the S&P 500 and Nasdaq to set new all-time highs, showing that the correction proved temporary.
2. Corrections turn into bear markets about a quarter of the time
The biggest fear around corrections is that they will turn into deeper market crashes.
The good news for investors is that only a quarter of corrections become bear markets, defined as drops of 20% or more from recent stock market peaks. Since World War II, there have been 48 corrections and just 12 bear markets. Corrections are a much more frequent occurrence in investing.
3. On average, it takes four months to recover from a correction
A 10% sell-off might seem significant, but if it doesn't stray into bear market territory, the stock market tends to bounce back relatively quickly. For sell-offs in the 10%-20% range, the average time it takes to recover is just four months. We got a taste of this last year as stocks quickly rose to new all-time highs following the Liberation Day sell-off.
4. Buying during a correction generally pays off
Generally, buying on the market's worst days has been a winning strategy. While not every stock during a correction goes on to set new all-time highs, the major indexes like the Nasdaq always do.
While the sell-off can seem scary, remember that stocks are trading at a discount and, over time, will recover to new heights.
