The Nasdaq Just Hit Correction Territory. History Says The Stock Market Will Do This Next (Hint: It May Surprise You)

The U.S. stock market has stumbled in recent weeks as the Trump administration imposed tariffs on goods imported from Canada, China, and Mexico, potentially starting a trade war. The market has been especially volatile because the White House has wavered on its trade policy, first imposing duties and then delaying or changing the terms.

The market dislikes uncertainty. The three major U.S. stock indexes are down more than 5% from their highs as of March 6: The S&P 500 (SNPINDEX: ^GSPC) has slipped 6.6%, the Dow Jones Industrial Average (DJINDICES: ^DJI) has declined 5.4%, and the Nasdaq Composite (NASDAQINDEX: ^IXIC) has tumbled 10.4%.

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Importantly, the Nasdaq has officially entered market correction territory, meaning it has fallen at least 10% from its most recent bull market high. Fortunately, the index has historically bounced back very quickly. While there are no guarantees, here's what usually happens next.

The Nasdaq Composite has historically rebounded quickly after closing in correction territory

The Nasdaq Composite measures the performance of more than 3,000 companies listed on the Nasdaq stock exchange. The index is most heavily weighted toward the information technology and consumer discretionary sectors, and is commonly regarded as a benchmark for growth stocks.

As mentioned, the Nasdaq on March 6 closed more than 10% below its most recent bull market high of 20,174, a level the index reached less than three months earlier on Dec. 16. That means the Nasdaq has entered a stock market correction, something it has done a dozen other times since 2010.

The chart below lists each date since 2010 when the Nasdaq first closed in correction territory. It also shows how the index performed over the next 12 months.

Data source: YCharts. A full year has not yet elapsed since the Nasdaq closed in correction territory on Aug. 2, 2024.

Since 2010, the Nasdaq has returned an average of 21% during the 12-month period following its first close in correction territory. Comparatively, the index has returned 15% annually over the entire period. That means the Nasdaq has historically produced above average returns following its first close in a market correction.

Importantly, past performance is no guarantee of future results. But we can use the information above to make an educated guess about how the Nasdaq might perform in the next year. Specifically, the index closed at 18,069 on March 6, so it would advance 21% to 21,863 in the next year if its performance aligns with the historical average.

Image source: Getty Images.

The Nasdaq Composite may continue to fall due to uncertainty about trade policy

The tariffs proposed by the Trump administration as of Feb. 27 would increase the average tax on U.S. imports to 13.8%, according to one estimate, the highest level since 1939. Several duties have already taken effect, rattling the stock market. Businesses can either absorb the cost increases or pass them to buyers. Margins fall in the first scenario, and sales likely fall in the second scenario. Either way, tariffs probably hurt corporate earnings.

However, investors are particularly nervous because the Trump administration has waffled back and forth on its trade policy. It planned to impose tariffs on goods from China, Canada, and Mexico on Feb. 4, but delayed duties on Canadian and Mexican imports until March 4. The administration then adjusted the terms on March 6, such that goods in compliance with the free trade agreement are exempt until April 2.

That whipsawing on trade policy has created uncertainty, and the stock market will likely remain volatile until that uncertainty dissipates. But investors can take solace in this indisputable fact: The Nasdaq Composite has recovered from every correction and there is no reason to believe this one will be different. That means the current drawdown is a buying opportunity.

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Trevor Jennewine has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.