Are We Heading for a Correction?
Could the Iran conflict trigger a market correction? We look at what's historically driven drawdowns and why long-term investors shouldn't panic.
With the S&P 500 climbing to repeated all-time highs over the past two years, many investors are wondering if the recent market pullback will lead to a correction, which is a market decline of more than 10% from its prior high. However, market drawdowns are a normal part of investing and often present buying opportunities for long-term investors.
- Stock market drawdowns, or declines from peaks, are common, as shown in the chart above. Since 1996, the average drawdown in the S&P 500 has been 16% in a calendar year, and drawdowns of at least 10% have occurred in 19 of the past 30 calendar years. Despite significant drawdowns, S&P 500 returns have been positive in 24 of the past 30 calendar years.
- Generally speaking, market corrections have historically had at least one of three catalysts: higher interest rates, rising unemployment, or a global (exogenous) shock. Indeed, the last three significant corrections were driven either by exogenous shocks (U.S. trade tariffs in early 2025 and the Covid pandemic in 2020) or rising interest rates (2022). While it is possible the next correction could be driven by escalation in the Iran conflict, which may put upward pressure on oil prices and near-term inflation, we believe that history suggests geopolitical events have not derailed markets for long. Over the past 30 years, the median S&P 500 return following the outset of geopolitical conflicts has been 7% over six months and 10% over twelve months.1
- In our view, corrections are nothing to fear for the long-term investor. Measured in trading days over the past half century, the S&P 500 has been in correction territory 42% of the time. However, the index has still delivered a total return over 11.8% annually over that time, turning a $10,000 hypothetical investment into over $2.6 million.2 While market drawdowns can be difficult to endure, we believe our work supports the adage: it’s time in the market, not timing the market.
1 The S&P 500 median price return calculated 12 geopolitical conflicts starting from the Kosovo War in March 1999 through the Isreal-Hamas War in October 2023.
2 The S&P 500 annualized total return was calculated from 2/28/1976 through 2/28/2026.
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