It’s officially a correction, so where to from here?

As of last week, the S&P 500 in the US had fallen ten per cent from its February highs.

A fall of that magnitude is generally considered a market correction, so we’re officially in one of those now.

Market corrections are normal.

This is the 34^th that the S&P 500 has experienced since 1960, so they come every two years or so, on average.

The last came in the second half of 2023.

Ten of the previous 33 corrections evolved into more painful bear markets, where the S&P 500 fell by 20 per cent or more.

Most of those periods were associated with recessions.

The other 23 led to an average decline of 14.2 per cent and lasted an average of four months before the market recovery took hold.

On that basis (and assuming the US doesn’t fall into recession), you could say we’re about 70 per cent of the way through this one and that the bottom is probably in sight.

My crystal ball isn’t any better than yours, and I’d be lying if I said I know where things go from here.

However, here are four things keeping me from getting too negative too early.

1. It’s confidence that’s the problem right now, not growth.

The US economy is not on the brink of recession, at least not yet.

The unemployment rate has been stable for the past 12 months, and at 4.1 per cent it’s well below the long-term average (which is 5.8 per cent over the past 20 years).

The manufacturing sector is expanding for the first time since 2022, and corporate earnings growth has been very healthy.

What we are seeing is slumping confidence, with recent surveys from the Conference Board and the University of Michigan seeing big drops.

That shouldn’t be ignored, because confidence is an extremely powerful force in the economy and financial markets.

One or two months of weak confidence figures isn’t enough to change the outlook dramatically, but if it becomes entrenched, it could have a big impact.

2. Central banks have much more scope to cut rates today.

The Federal Reserve in the US has reduced its policy rate from its peak of 5.50 per cent, but at 4.50 per cent it’s still the highest since 2007.

Even if slumping confidence does lead to weaker growth, the Fed has plenty of scope to cut rates today.

That’s a very different situation to where it was in the 2010s when rates were already very low, or during 2022 when rampant inflation stood in the way of rate cuts.

In New Zealand our OCR is above neutral at 3.75 per cent, while the Australian and UK equivalents are above four per cent, and Europe also has a bit of breathing space with a policy rate of 2.50 per cent.

3. While the US falters, there are plenty of markets holding up better.

After slipping ten per cent from its peak, the S&P 500 ended last week 4.1 per cent below where it started the year.

After back-to-back annual gains of more than 20 per cent we can’t get too upset about that.

These moves have been amplified by the performance of the Magnificent 7 group of stocks, which rose 160 per cent during 2023 and 2024, and have fallen almost 20 per cent since Christmas.

However, even though it’s the biggest and highest profile, the US isn’t the only market in the world.

European, UK and emerging market equities are all up solidly this year.

New Zealand shares have given back some of last year’s gains, but local fixed income is in positive territory and US Treasury bonds are higher on the back of lower interest rates.

Gold – a great diversifier to hold in a portfolio – is up more than ten per cent in 2025, as is often the case during periods of uncertainty.

If your portfolio has been well spread, you’ll be weathering the storm better than you might think.

4. Investors are nervous, which tends to be a good thing.

Wall Street strategists, who were all unanimously optimistic at the beginning of the year, have been cutting their year-end targets for the S&P 500 as markets weaken.

Individual investors have been getting much more cautious too.

The AAII Sentiment Survey in the US has been going since 1987, and it asks investors where the market is heading in the next six months.

The four-week moving average of negative sentiment has jumped sharply, and investors haven’t been this negative since late 2022, which turned out to be the bottom of the last market downturn.

Apart from that, you need to go back to March 2009 (the GFC bottom) and before that 1990 to find a time when investors were as nervous as this!

That doesn’t mean we’re at the bottom or that it’s the right time to buy, but a cautious tone is usually healthier than widespread optimism (as was the case at the beginning of the year).

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