Corrections and Bear Markets

Great Investments Programme Research Paper

As of March 2025, the S&P 500 has entered correction territory, declining 10.1% from its recent high. This development has sparked discussions about the potential for a bear market and the implications for investors.

Understanding Corrections and Bear Markets

A market correction is defined as a decline of at least 10% from a recent peak, while a bear market is characterised by a drop of 20% or more. Historically, corrections are relatively common and often serve as mechanisms for the market to recalibrate valuations.

However, not all corrections evolve into bear markets. Since World War II, the S&P 500 has experienced 48 corrections, with only 12 (25%) progressing into bear markets. This statistic suggests that while corrections can be unsettling, they do not typically lead to prolonged downturns.​ 

Historical Context

The last significant correction occurred in late 2023, triggered by concerns over Federal Reserve policy signals. Prior to that, the 2022 bear market saw the S&P 500 decline 25.4% between January 3 and October 12, 2022. These instances highlight that while corrections and bear markets are part of market cycles, their durations and impacts can vary significantly.​ 

Current Market Dynamics

The recent correction has been influenced by several factors, including concerns over a potential U.S. recession, uncertainty related to tariff policies, and fears of a government shutdown. Additionally, technical indicators such as the percentage of S&P 500 stocks trading below their 200-day moving averages have reached 64.4%, signaling potential market weakness.

Frequency of Corrections Turning Into Bears: Market corrections (defined as declines of 10% or more from a peak) occur fairly regularly, but only a fraction of them escalate into full bear markets (20%+ declines). Since 1929, the S&P 500 has seen 56 corrections, of which only 22 (around 39%) turned into bear markets. 

In more modern eras the odds have been even lower – since World War II, roughly 25% of corrections have led to bear markets. For example, from 1971 to 2021 (about 50 years) there were 33 corrections in the S&P 500 and only 7 of those (≈21%) culminated in bear market drops.

During the long bull run from 2009–2020, the market experienced five separate ~10% corrections driven by various fears, yet none of those turned into a bear market until an external shock (the 2020 pandemic crash) finally ended that bull cycle. In short, most corrections do not become bear markets. The chart below illustrates this historically: only a minority of corrections “graduate” to bear status.

Average Depth and Duration: Corrections that stay as corrections tend to be milder and shorter than bear markets. On average, corrections that don’t turn into bears see an S&P 500 drawdown of about –14% and last around 4 months from peak to trough. In contrast, bear markets have historically inflicted an average decline of roughly –35% to –38%. 

Bear market downswings also unfold over a longer period – the average bear since 1929 lasted on the order of 10 to 19 months (roughly 289 days on average in one study, though some prolonged bears have dragged on well over a year). 

For example, the median bear market takes about 10 months to find a bottom, versus just ~3–4 months for a typical correction. Historically, bear markets occur periodically (the long-term average frequency is about one every 3–5 years). 

Fortunately, they’ve been relatively infrequent in recent decades (only 15 bears since 1945, about one every 5.1 years). In summary, while 10% pullbacks happen almost yearly on average, only about 1 in 4–5 grows into a true bear market, and those worst-case scenarios, while painful, tend to be much shorter than the multi-year expansions that precede them.

Time for a Correction to Turn into a Bear: When a correction does escalate, it usually becomes evident over several months as losses deepen. Research shows that corrections which avoid turning into bears typically bottom out after ~133 days (about 4.4 months) with around a –14% decline, then recover within ~113 days. 

However, if the downturn is going to become a bear, the slide tends to continue and last far longer. Going back to 1929, bear markets have taken an average of ~19 months to reach their ultimate lows. In other words, a garden-variety correction that is fated to transform into a bear will usually keep falling past the –20% threshold and persist for a year or more. 

For instance, the 2007–09 bear market slowly ground stocks down over about 17 months, whereas a quick correction like the 10% drop in late 2018 reversed after 3 months once conditions improved. Investors often have some time to recognize a bear forming, as opposed to a swift 10–15% dip that stabilizes. 

The bottom line: by the time losses mount from –10% toward –20%, typically a worsening fundamental backdrop is unfolding (signaling a bear), whereas if the storm passes in a few months, the market usually resumes its uptrend without entering a prolonged downturn.

Timing and Causes of the Last Bear Market

When and What Caused It: The most recent bear market in the S&P 500 began in early 2022. Stocks peaked on January 3, 2022, then slid into a bear as rampant inflation and aggressive Federal Reserve tightening spooked investors.

This bear market was fundamentally triggered by the Fed sharply raising interest rates to combat the worst inflation in decades. Surging prices (inflation hit ~40-year highs in 2022) prompted rapid rate hikes, which in turn fueled worries that the economy would tip into recession.

Those recession fears (combined with geopolitical shocks like the Ukraine war) undermined sentiment and led to a prolonged sell-off. Notably, the feared deep recession never fully materialised in 2022, but the anticipation of an economic downturn was enough to send the S&P 500 down more than 20%. 

From its January high to the low on October 12, 2022, the S&P 500 fell 25.4%, officially qualifying as a bear market. This decline lasted about 9–10 months, which is close to an average duration for past bears.

Duration and Recovery: The 2022 bear market’s trough in October 2022 marked the bottom of that cycle. After that point, the market gradually recovered as inflation began cooling and the economy showed resilience (avoiding a hard recession). 

By mid-2023, with inflation rates coming down and the Fed slowing its rate hikes, stock prices had rebounded significantly – the S&P 500 gained over 20% from the October low, retracing a large portion of the decline. 

However, it took time to approach the prior peak; the index remained below the January 2022 record high for well over a year. This measured recovery reflected lingering caution, but ultimately the market response was positive once it became clear that a “soft landing” (lower inflation without a deep recession) was plausible.

It’s instructive to compare this to the previous bear market (March 2020), which was a very different episode. That bear was sparked by the sudden COVID-19 pandemic outbreak and resulting global shutdowns. 

The S&P 500 plunged 34% in just 33 days in February–March 2020 – the fastest collapse into a bear market on record. Importantly, that crash was met with unprecedented policy response: the Federal Reserve slashed interest rates to zero and unleashed trillions in stimulus, while Congress passed massive fiscal aid. As a result, the 2020 bear market turned out to be the shortest ever, and the recovery was extremely rapid. Stocks bottomed on March 23, 2020 and then soared ~55% over the next five months. 

By late August 2020, the S&P had fully regained its pre-pandemic high, marking a full round-trip in roughly half a year. This whiplash turnaround – from a ferocious 1-month bear to a new bull market – was highly unusual.

Most bear markets, including 2022’s, do not rebound that quickly. In 2022, the Fed was tightening (not easing) during the downturn, so the rebound was slower as investors waited for inflation to peak and for the Fed to potentially pause.

Length and depth of recent S&P 500 bear markets. The 2007–09 bear (Global Financial Crisis) lasted 17 months and the S&P 500 fell 57%, taking roughly four years to fully recover its losses. In contrast, the 2020 COVID crash (–34%) lasted barely 1 month and was erased in just 5 months of recovery.

The 2022 bear (–25%) lasted about 10 months; its recovery (marked as ongoing in mid-2022 above) was largely achieved throughout 2023 as the market climbed out of the trough. 

Key takeaway: the last bear market (2022) was relatively short and moderate by historical standards, especially compared to crises like 2008–09, and the market began healing once the root causes (inflation surge and recession fears) started to abate.

Key Indicators of a Bear Market

What warning signs typically accompany a bear market? While every cycle is different, bear markets are often foreshadowed by a confluence of economic and market indicators turning negative. Here are some key indicators that increase the likelihood of a prolonged downturn:

• Economic Slowdown or Recession: A weakening economy is a classic bear market signal. Bear markets often go hand-in-hand with recessions, meaning GDP growth turns negative and unemployment jumps. When corporate earnings and consumer spending decline broadly, stock prices tend to fall in tandem. Historically, most (though not all) bear markets coincide with recessions and rising joblessness.
  

• For instance, the severe 2008–09 bear was accompanied by a deep recession and surging unemployment, and the 1973–74 bear overlapped with a stagflationary recession. (Notably, there have been exceptions like 1987 or 1962 where stocks fell sharply without an official recession, but a slowing economy greatly raises bear market odds.)
  

• Inflation and Interest Rates: High inflation and sharply rising interest rates are bearish omens. When inflation overheats, the Federal Reserve and other central banks respond by hiking interest rates, which increases borrowing costs and can choke off economic growth. Many historical bears have been preceded or triggered by aggressive Fed tightening cycles. 
  

• For example, the bear markets of the early 1980s corresponded with the Fed’s fight against double-digit inflation (pushing interest rates up dramatically), and the 2022 bear market was precipitated by the Fed’s rapid rate hikes in response to red-hot inflation. As rates climb, bonds become more attractive relative to stocks and companies face higher financing costs, putting downward pressure on equity valuations. 
  

• An inverted yield curve (short-term rates rising above long-term rates) is one specific warning sign – it reflects tight monetary conditions and has historically been a reliable predictor of recessions and bear markets. In short, tightening financial conditions – whether via interest rate hikes, reduced liquidity, or a yield curve inversion – often herald an oncoming bear.
  

• Corporate Earnings Deterioration: Earnings are the engine of stock prices. When corporate profits begin to decline for multiple quarters, it’s a strong indicator that the market may be heading for trouble. In bear markets, we typically see company earnings fall as the economy slows or costs rise. For example, ahead of the 2000–2002 bear market, many tech companies saw earnings and revenue falter after the dot-com boom peaked. 
  

• Similarly, in 2007–08, bank and corporate profits turned downward as the housing market cracked. If forward earnings guidance is being cut broadly and profit margins shrink, stocks often price in a steeper decline.

  
  

  Weak sales and high inventories (companies unable to sell product as expected) are related red flags that demand is weakening. In essence, a trend of deteriorating fundamentals – slower revenue growth, declining earnings, and other signs of corporate strain – is a hallmark of bear market conditions.
  

• Investor Sentiment and Market Sentiment: Extremes in investor psychology can signal a coming inflection point. Bear markets are often preceded by a period of euphoric sentiment and overvaluation – a “boom” where investors assume markets will only go up.

  
  

  Such was the case in the late 1920s prior to the 1929 crash, the late 1960s Nifty Fifty craze, and the late 1990s dot-com bubble. In those episodes, valuations reached unsustainable levels and speculative behaviour was rampant (IPO frenzies, retail trading manias, etc.). 
  

• When reality failed to meet those overoptimistic expectations, the market reversed violently. Conversely, once a bear is underway, sentiment swings to extreme pessimism (high fear indicators, spikes in the volatility index VIX, bearish investor surveys). While fear itself usually lags the start of a bear, the excessive optimism at the prior peak is a warning sign in hindsight. 
  

• Analysts monitor measures like price-to-earnings ratios, investor leverage, and surveys of bullish vs. bearish sentiment for signs of complacency. Widespread speculative excess – for example, the crypto and meme-stock mania seen in early 2021 – can indicate that a market is overheated and vulnerable to a sharp downturn. In summary, “too good to be true” sentiment and valuations often precede bear markets, while panic and capitulation tend to mark their later stages.
  

• Federal Reserve Policy and Credit Conditions: The stance of central banks and overall credit conditions play a pivotal role. As noted, Fed tightening is a common thread in many market peaks. When the Fed is withdrawing support – raising rates or tapering bond purchases – it removes a key tailwind for stocks. Liquidity dries up and risk assets re-price lower. 
  

  A classic pattern is that the Fed will hike rates until “something breaks” economically, leading to a market drop. On the flip side, the Fed easing policy (rate cuts, stimulus) often helps put a floor under stocks. For example, in late 2018 the Fed’s signals of a pause/cuts helped halt a steep correction. 
  

• Credit market stress is another factor: widening credit spreads (investors demanding higher yields on corporate bonds due to default fears) can signal that financial conditions are eroding – a canary for the stock market. The 2008 crisis is an extreme case where frozen credit markets and banking woes fuelled the equity bear. Thus, observers watch things like the health of the banking system, corporate debt levels, and bond spreads. Deterioration there often accompanies bear markets. 
  

• In short, bear markets usually emerge when monetary and financial conditions tighten significantly – whether due to policy choices (rate hikes) or forced by events (credit crunches) – which in turn stifles economic and profit growth.
  

No single indicator guarantees a bear market, but a combination of the above signals strengthens the case that a downturn could deepen. For instance, an inverted yield curve coupled with falling corporate earnings and overly bullish stock valuations would be a worrisome mix. Investors and analysts keep an eye on these metrics to gauge whether a 10% correction is likely to snowball into something worse. If multiple red flags are flashing together, the probability of a bear market rises.

Comparative Analysis of Past Market Cycles

Current vs. Past Corrections: To evaluate whether the recent 10% correction is likely to deepen, it helps to compare current market conditions to those before past corrections and bear markets. 

One key factor is the economic backdrop. Many historical corrections that stayed as corrections occurred during ongoing economic expansions – the market dipped on fears or shocks but the economy’s underlying health kept the downturn shallow. 

For example, in 2011 the S&P 500 fell nearly 19% amid U.S. credit rating downgrade fears and Eurozone debt worries, but the U.S. economy avoided recession and the market recovered within months. Similar mid-cycle corrections happened in 2016 and late 2018; growth wobbled but did not collapse, and policy adjustments (like the Fed pausing rate hikes) helped stocks rebound. In contrast, the corrections that evolved into bear markets usually coincided with clear economic cracks: 2000’s correction became a bear as the dot-com bubble burst and a recession hit in 2001; a modest 2007 market pullback snowballed once the financial system started melting down, leading to the 2008–09 crash. 

Today’s environment does not (so far) exhibit the severe imbalances seen before the worst bears. For instance, corporate and bank balance sheets are generally stronger than in 2007, and while interest rates have risen, we are not seeing the kind of systemic credit freeze that precipitated the GFC bear market. The question is whether the current correction is more akin to an ordinary growth scare (like 2011 or 2018), or an early phase of a serious downturn.

Macroeconomic and Policy Factors: Coming into this correction,  unlike the 1970s, inflation now appears to be easing after peaking, and the Fed may will  next lower rates twice this year probably. Unemployment remains relatively low and GDP growth, while slowing, has not plunged into an outright contraction – this contrasts with periods just before deep bears, when the economy was clearly on the cusp of recession (e.g., late 2007 or early 2001, when economic activity was rolling over). 

If the economy can avoid a recession (or experience only a mild one), history suggests the market is more likely to experience a correction-level decline rather than a protracted bear. In fact, there have been 27 bear markets since 1928 but only 15 recessions in that time  – meaning roughly half of bear markets coincided with recessions, and the rest were market-driven. 

The current correction was partly sparked by fears of recession due to Trump tarriffs, but so far the economic data (e.g. job growth, consumer spending) has held up better than in past pre-bear episodes. 

This situation is somewhat analogous to 1998 or 2018: in both cases the Fed tightened and markets swooned (~20% drop in 1998, ~19% in late 2018), yet no recession followed and markets quickly rebounded. 

Key indicators to watch now are whether economic indicators start deteriorating sharply (e.g. if unemployment suddenly jumps or corporate earnings collapse). If not, the correction may stabilise. Furthermore, Fed policy is crucial – a pivot to faster easing could boost confidence. By late 20245(hypothetically), if inflation is under control, the Fed might even cut rates twice, which would be a bullish catalyst much unlike a typical bear market scenario where the Fed is still tightening into the downturn.

Market Conditions and Valuations: Another comparison point is valuation levels and market froth. Prior to major bears like 2000 or 2008, asset valuations were extremely stretched (the S&P 500 P/E ratio exceeded 30 in the tech bubble, and housing prices and leverage were at records in the mid-2000s). 

In the current market, valuations have moderated after the recent pullback. The S&P 500’s forward price-to-earnings ratio has fallen to around 18, which is actually below its 5-year average (~19) after this correction. 

That suggests stocks are not in a wildly overvalued territory relative to recent norms. In other words, we are not coming off a true bubble peak in broad equities (certain segments had high valuations, but not to the extent of past manias). Corporate earnings also continue to grow modestly in aggregate, whereas heading into the 2000–02 bear, earnings growth stalled out, and in 2008 earnings plummeted. 

Today’s profit outlook is more mixed but not all-out negative – many companies are still reporting solid results, and consensus forecasts (while maybe optimistic) have not been slashed dramatically.

This relative earnings strength and reasonable valuation could indicate the market is correcting from an overbought condition rather than pricing in a fundamental collapse. It’s worth noting, too, that investor sentiment has already turned cautious during this correction (evidenced by high cash allocations and defensive positioning), which can actually be a contrarian positive sign if extreme pessimism is reached.

In sum, current market conditions – moderate valuations, still-solid corporate earnings, and the lack of an obvious asset bubble – look more similar to past short-lived corrections than to the conditions preceding severe bears.

Patterns and Anomalies: Historically, bear markets tend to be spaced out, not clustered back-to-back. It’s relatively rare to see many bear markets in quick succession. The fact that we already endured a bear in 2020 and again in 2022 raises the question: is another one so soon likely, or would that be an anomaly? 

According to market historians, having three bear markets within a five-year span would be unprecedented in modern times. (For perspective, the 1970s featured a couple of bears early in the decade and another in 1981–82, but generally decades see 0–2 bears. The 1990s and 2010s had zero true bear markets in the S&P 500, while the 2000s had two – the tech bust and the financial crisis.)

The 2020s have already seen two bears in rapid succession (the pandemic crash and the 2022 decline). Statistically, a third bear market forming immediately on the heels of these would break historical norms. 

Bear markets per decade for the S&P 500. As the graphic shows, most decades since the 1950s experienced at most two bears. The 2020s (’20s) already count two bear market starts (2020 and 2022). 

Having another commence in the same decade (especially so early in the decade) would be highly unusual. This doesn’t mean it cannot happen – every period is unique – but the odds, based on frequency alone, lean against a third severe drawdown so quickly.

This pattern suggests that the market may instead be in a normal correction within an ongoing cycle, rather than at the start of yet another bear market so soon after the last one.

Outlook – Will the 10% Correction Deepen? Considering the comparisons above, the evidence leans toward cautious optimism that this is a correction and not the start of a major bear. The current correction, while certainly concerning, lacks some of the key ingredients that have defined true bear markets (such as a looming recession with spiking unemployment, extreme asset valuation bubbles, or a systemic financial crisis).

Instead, it appears more driven by a re-pricing to tighter monetary conditions and growth uncertainties – factors that can cause a 10–15% pullback but are reversible if conditions improve. 

Indeed, if inflation continues to ease and the Federal Reserve signals a dovish shift, that would mirror scenarios like mid-1990s or 2018 when corrections gave way to renewed rallies. Markets have already begun to stabilise recently on hopes that rate hikes may be nearly done. 

History also tells us that staying invested through corrections is often prudent, as most do not turn into bears and the market often recovers within months. Of the 15 corrections since 2008, all but two saw the market higher a year later, with an average +15% gain in the following year. 

While past performance is no guarantee, this underscores that more often than not corrections are temporary detours, not trend reversals.

That said, vigilance is warranted. If new data emerges showing the economy cracking (for example, if corporate earnings plunge unexpectedly or geopolitical risks trigger a shock), the calculus could change.

A few cautionary comparisons remain: Trump Tarriffs, global risks – energy prices, war, etc. – could yet surprise. But absent a clear catalyst for a deep contraction, the base case is that this 10% pullback is part of a normal market cycle adjustment.

Market veterans often note that bear markets require a “cause” – be it an economic recession, a financial implosion, or extreme overheating – and while we do see pressures (inflation, etc.), we also see a resilient economy and proactive policy which mitigate those causes.

Sources:

• S&P 500 correction and bear market statistics – Yardeni Research data via Reuters (S&P 500 correction in six charts | Reuters) (S&P 500 correction in six charts | Reuters); Carson Investment Research (Houston, We Have a Correction. Now What? - Carson Group).

• Historical bear market frequency, depth, and duration – Ned Davis Research via Hartford Funds (10 Things You Should Know About Bear Markets) (10 Things You Should Know About Bear Markets); S&P Dow Jones Indices via AP News (A 10% drop for stocks is scary, but isn't that rare) (A 10% drop for stocks is scary, but isn't that rare); Yardeni data via Reuters (Say goodbye to the shortest bear market in S&P 500 history | Reuters).

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Alpesh Patel OBE

www.campaignforamillion.com 

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