A 10% drop for stocks is scary, but isn't that rare

U.S. Stock Market Slumps 10% Amid Economic and Trade War Fears

The U.S. stock market has fallen 10% from its recent peak, rattled by concerns over the economy and a potential global trade war.

This drop in the S&P 500 is significant enough to be classified as a "correction," a term Wall Street uses for declines of 10% or more. Such pullbacks have occurred regularly for over a century, often serving as a necessary reset to curb excessive market exuberance. However, they can be unsettling, especially for newer investors who have only experienced a market that seemed to move upward.

The S&P 500 had posted two consecutive years of gains exceeding 20%, which some critics argued made stocks overvalued as prices rose faster than corporate earnings. While corrections can temper speculative trading, the bigger concern is whether they signal a deeper downturn—a "bear market," defined as a decline of at least 20%.

The Role of Trade Policy in Market Volatility

Following Donald Trump's election, stocks initially surged on expectations of business-friendly policies, such as tax cuts and deregulation. However, those gains have since been erased as Wall Street weighs the risks of his administration’s trade policies.

Trump’s tariff decisions have been unpredictable—announcing, exempting, and reinstating them at a rapid pace. These measures could impact every U.S. trading partner, driving up prices for businesses and consumers at a time when inflation remains stubbornly high. The fear is that tariffs might slow, or even halt, the economic momentum seen at the end of 2024. Even if the final tariffs prove less severe, the ongoing uncertainty could stall economic activity, as reflected in weakening consumer confidence and corporate profit forecasts.

Even Trump has acknowledged that his policies may affect economic growth.

The Federal Reserve’s Dilemma

The uncertainty surrounding trade policy complicates the Federal Reserve's efforts to manage interest rates. The Fed had been cutting rates to bring inflation closer to its 2% target, but further reductions could risk reigniting inflationary pressures.

Meanwhile, the sell-off has been particularly harsh for stocks that had surged in the artificial intelligence boom. Nvidia, which had skyrocketed over 800% between 2023 and 2024, has already dropped about 14% in 2025. Other major tech companies in the "Magnificent Seven," which had been key drivers of the market, have also struggled, dragging down the broader S&P 500.

Lessons from Past Market Corrections

Market corrections happen frequently. Even during the nearly 11-year bull market from 2009 to 2020, the S&P 500 experienced five corrections, triggered by concerns ranging from interest rates to trade disputes to Europe’s debt crisis.

The last correction occurred in 2023, when the S&P 500 dropped 10.3% from July to October. At the time, surging Treasury yields pressured stock prices, as investors adjusted to the idea that the Fed would keep rates higher for longer. However, optimism about potential rate cuts soon revived the market.

The most recent correction that escalated into a full bear market happened in 2022, when the Fed aggressively raised interest rates to combat historic inflation. Fears of an impending recession loomed, but a downturn never materialized. By the time that bear market ended, the S&P 500 had lost 25.4% from its peak.

Historically, corrections that do not become bear markets have taken an average of 133 days to bottom out, with losses averaging 14%, according to CFRA. Recovery times have averaged 113 days. In contrast, bear markets are more severe, typically lasting 19 months and leading to declines of 38.5%.

The most devastating bear market occurred from 1929 to 1932, when stocks plunged over 86%. Another prolonged downturn from 1937 to 1942 saw U.S. stocks lose 60%. Japan’s Nikkei 225 provides an even starker example—it took until 2024 to recover from its 1989 peak.

However, history suggests that patient investors eventually recoup their losses. This was true during the dot-com crash of 2000, the 2008 financial crisis, and the 2020 COVID-19 market collapse.

What’s Next?

No one knows for sure. Some analysts believe Trump may adjust his policies if they prove too damaging, while others warn that the uncertainty itself is already weighing on the economy.

While the U.S. economy has remained relatively stable—evidenced by strong job reports—the future remains uncertain. With so many unknowns, investors are bracing for a volatile ride.