U.S. stock markets have experienced sharp swings in recent weeks as the S&P 500 slid more than 5% from its January peak, marking its first such pullback since November. The move has coincided with an intensifying conflict involving Iran and higher crude oil prices, forces that have pushed inflation concerns back onto investors' radar and weighed on equities.
The benchmark index closed down 5.1% on Wednesday as market participants evaluated whether the current weakness presents a tactical buying opportunity or the start of a deeper decline. Investors are parsing a familiar pattern - modest drawdowns that often resolve quickly, and a smaller subset that evolve into more severe corrections or bear markets - while trying to judge the likely path forward.
Drawdowns of 5% are not exceptional over the long term. An analysis of LSEG data shows roughly 60 episodes since the index's 1957 inception in which the S&P 500 first fell at least 5% from a record high. Of those instances, only 22 proceeded to slip 10% or more before the index established a new high, while about 10 continued to decline by 20% or worse, a move classified as a bear market.
Frequency statistics highlight how these moves have occurred through many market cycles: over the past seven decades, a drawdown of 5% or greater has emerged about once every 14 months on average. That historical backdrop gives investors both a source of comfort and a reason for caution.
“People look at this and say, oh, you know, we’ve seen pullbacks like this before ... they usually work out OK,” said Steve Sosnick, chief strategist at Interactive Brokers. The observation points to the tendency for many moderate declines to reverse within a relatively short time frame.
Supporting that view, historical return data following the first day the S&P 500 slips at least 5% below its then-record high show a record of positive forward returns. In only 14 of the last 59 such instances was the index lower one month later. The median one-month gain after the initial 5% slip was 2.44%, compared with the S&P 500's median one-month forward return of 1.09% across all trading days since 1957. Median returns three and six months after the initial pullback were 4.82% and 7.01%, respectively, versus long-run medians of 2.59% and 4.97% for those same horizons.
Yet history also contains cautionary examples. Sam Stovall, chief investment strategist at CFRA, noted that the pattern of price action before a pullback matters: when the S&P 500 spends an extended period trading in a narrow band below its all-time high before drifting down into a 5.0% to 9.9% pullback, subsequent declines tend not to exceed 20% - a statistical observation that offers some reassurance but not a guarantee.
The depth of a pullback is a critical determinant of how long investors must wait for new highs. Market data show a stark bifurcation: if the market stabilizes before dropping 10% from its record high, the average time to reclaim a new high is about 37 trading sessions. But if the index falls more than 10%, the average time to a new high lengthens substantially to roughly 448 trading sessions.
Amid those historical patterns, investor behavior this episode has been measured. Traders and portfolio managers have shown a degree of hedging and restraint rather than outright panic, a stance reflected in volatility gauges that are elevated versus recent norms but still well below levels typically seen at market bottoms. “Part of this can be chalked up to investors having hedged any further downside, so not in panic mode,” said Jim Carroll, a portfolio manager at Ballast Rock Private Wealth.
Market participants point to three interlinked variables that will largely shape the path ahead: the duration of the Iran-related conflict, whether the resulting energy shock from higher crude prices persists, and the extent to which elevated energy costs transmit into weaker economic growth in the U.S. and abroad. Those factors will determine whether the current 5%-plus drop resolves into a short-lived buying opportunity or deepens into a larger correction.
What investors are doing now
Despite the history of recoveries after shallow pullbacks, investor buying has been more cautious this time. “Our customers still tend to be net buyers of stocks, but not nearly as aggressively as we’ve seen through other flushouts,” Sosnick said. “The conviction is less intense ... the level of buying is less intense.”
That cautious stance leaves markets vulnerable to further pressure if oil prices remain elevated or political tensions broaden. At the same time, it limits the depth of forced selling, supporting the case that any larger move lower would likely require a substantive deterioration in economic indicators or wider geopolitical escalation.
For now, the market sits in a familiar yet uncertain state: a meaningful pullback that historically often presents an attractive entry point, coupled with clear and present risks tied to energy markets and geopolitical developments that could extend or deepen the downturn.