The market volatility that began in February hit a milestone last week. On Thursday, the S&P 500 closed -10% below its prior high, meeting the typical definition of a market ‘Correction.’ Stocks have recovered some of those losses in the days following, but it remains unclear whether the selloff has run its course. So, how severe is a -10% decline in the grand scheme of things? And what usually happens in the market after a correction?

Before we get there, here’s a little background. After two consecutive years of above-average returns for U.S. stocks, investor sentiment was running hot coming into 2025. In recent weeks, that sentiment has cooled in a major way. There are a variety of things that are likely weighing on stock prices:

• Tariff uncertainty
• Weakening consumers/recession fears
• Stubborn inflation
• Cracks in the AI trade

Perhaps the most overlooked challenge for investors is the fact that valuations for U.S. large-cap stocks have become very lofty during the market’s strong multi-year gain. Valuations rise when stocks appreciate too quickly compared to company earnings, often the result of expectations for continued growth outpacing reality.

The challenge arises because valuations have a strong tendency to revert to historical norms. The more valuations become stretched, the sharper the potential correction. This phenomenon makes an expensive market vulnerable. It often doesn’t matter what the catalyst for the selloff is. It just takes something (anything) to pierce through the prevailing view that stocks can only go up.

Regardless of the cause, market declines are not unique. The table below illustrates some historical data regarding the frequency of declines of different magnitudes. It may be surprising to see just how frequently these (and larger) selloffs have occurred.

Since 1928:

• The market has dipped by at least 1% in every single year.
• Most years have seen a decline of at least 5%.
• Corrections (10% declines) have typically occurred every other year.
• Bear markets (20% declines) have occurred about every four years.
• Larger declines can and do happen, albeit with less frequency.

Frequency of Stock Market Declines
S&P 500, January 1928 - December 2024

Source: Bilello Blog

As we can see, despite the discomfort that accompanies them, market corrections are not a rare occurrence. If these episodes are something we will have to live with, what can investors expect following a correction?

The table below provides some historical data to answer that question. It looks at market performance after a selloff of more than 10%. Going back to the mid-1920s, the market has typically rebounded with an 11.7% gain in the year following a correction. Three to five years later, the market has averaged a 10.3% and 9.6% return per annum respectively. So, while drawdowns are common, so too are the subsequent recoveries, which tend to be right in line with the market’s historical average return of about 10%.

Average Annualized Returns
After Market Decline of More Than 10%
S&P 500, January 1926 - December 2024

Source: Dimensional Fund Advisors

Despite the way they are portrayed in the media, selloffs are a normal and healthy feature of investing. While the exact causes behind the current episode are specific to today’s unique environment, the same basic progression is likely to play out:

• Volatility will wash away excess excitement.
• Businesses will adapt to the changing environment.
• Prices will correct to a level that allows the market to deliver a reasonable return moving forward.

If you are feeling uneasy about your investments right now, you’re not alone. Perhaps we are near the end, or maybe it’s about to get worse. While the path forward is unpredictable, history can offer a guide. A hundred years of past market cycles, ranging from minor blips to the Great Depression, have provided a playbook for investors. The trick to successfully navigate periods like this is to keep your head and stay the course. History tells us that those who stay invested through downturns not only recover their losses but often emerge stronger. The market rewards patience, and reacting emotionally to short-term volatility can be far more costly than the declines themselves.

Source: MarketWatch

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