The S&P 500, the broadest measure of US equity prices, recorded a market correction in August 2015. This was the 15th instance of an S&P market correction — defined as a decline in stock values of least 10% for more than a month — since World War II.
Historically, some of these corrections were abrupt, with values falling sharply then recovering. Others dragged on for many months. Each instance begs questions about the correction’s impact on the broader economy.
To examine stock market corrections and their economic significance, Dun & Bradstreet compared the timing of these correction periods with the dates of the US economy’s peak and subsequent downturn, according to the National Bureau of Economic Research.
What Argument Does the Data Support?
More times than not a correction had little leading economic-cycle capabilities. For instance, the recessions of 1953, 1960, and 1973 saw no major correction in equity prices leading up to each recession.
The recession of 1969 recorded three corrections before the business cycle peak, once during May 1962, another in May 1966, and the third occurring in June 1969 — three months before the business cycle peak.
Multiple stock market corrections became more frequent as the US modernized; the 1980 recession recorded two prior equity-market corrections, as did the 1990 and 2001 recessions. Since the 1970s, every recession had at least one correction in the S&P 500.
Since the Global Financial Crisis, the S&P 500 has corrected on two occasions, during 2011 when the US was downgraded by S&P and once again in August of this year.
While there is little evidence to suggest that a market correction signals impending doom, one thing is for sure: Market corrections are common. The US has faced two S&P 500 corrections since the last recession. The verdict is still out on whether this means the economy has peaked and is declining, or just going through a healthy transition.