Investors have very short memories. This is why it is so important for investors to pay attention to Wall Street history. That's doubly true for investors who are new to the game, since a lack of experience basically means there hasn't been enough time to have seen the types of things that can happen when times get really tough.
The media has made a lot of the S&P 500 index's 2025 correction and the bear market that the Nasdaq Composite fell into. But the truth is, you ain't seen nothin' yet.
First, some downturn definitions
A market correction is generally defined as a retreat from all-time highs of between 10% and 19.9%. A bear market is any decline of over 20%. Corrections and bear markets are a normal part of the stock market. In fact, they can be good things in the long run, even though they hurt in the short term.
Essentially, they help to take the air out of bubbles that may not be driven by sustainable investment or business fundamentals.
Image source: Getty Images.
When investors get overly enthusiastic, prices usually rise to an extreme level based on nothing but emotions. That feels good, but it is not sustainable. Eventually, something happens and the mood shifts. A correction is the first step of bleeding out some air from a bubble. But it is also the pathway to a bear market, which usually doesn't find a bottom until investor sentiment has turned from enthusiasm to despondent pessimism.
To put that a different way, the risk of corrections is still high, even if the market continues to trade higher after some of the initial volatility subsides. But a bear market is a different beast; it pushes investors to the point where they don't want to buy anything at all.
Fear is the driving force at bear market lows. If you step back and look at the market's swings in 2025, investor sentiment is still a long way away from despondent pessimism.
How bad can it get?
The last bear market occurred during the coronavirus pandemic in 2020. It was mercifully short, largely because it was driven by governments around the world effectively shutting their economies down to slow the spread of COVID-19. Vanguard S&P 500 Index ETF(NYSEMKT: VOO) fell about 30% or so. Investors feared a potentially permanent impact from the pandemic fueling global stock market sell-offs.
Fortunately, that fear was short-lived, and the world has managed to learn to live with COVID-19. But that hasn't always been the case with bear markets. For example, the uncertainty during the 2007 to 2009 financial crisis, also known as the Great Recession, and the associated bear market was far more prolonged.
The bear market during the Great Recession took several years to play out, and it took several more years for the markets to fully recover. It was also quite deep, with SPDR S&P 500 ETF(NYSEMKT: SPY) falling around 50% from peak to trough.
If you weren't investing at that point, or you have let the memory of this traumatic period slip from your mind, it was a horrible period in which to invest, with very real fears that the global economic system might collapse at any second. The relentless down days simply pounded investors to the point where they sold just to preserve any last scrap of wealth they had.
Not to be overly dismissive of the emotional pain that occurred, but that was a good bear market. It was what a really painful downturn feels like, as investors eventually just gave up and capitulated. The coronavirus pandemic downturn was not a particularly notable event by comparison. But go back a little further, and there's another bear market that's worth highlighting around the time of the dot-com bubble.
The bear market that occurred at the turn of the century was not as deep as the one around the Great Recession. However, it, too, played out over an extended period of time. Additionally, the recovery was also long drawn out. In fact, the recovery didn't really occur until just a short period before the next bear market.
But like the Great Recession period, investors eventually gave up out of fear, and it took a long time to coax existing investors back into the market while also bringing in a new batch of investors that hadn't suffered through the downturn.
There are two important takeaways here. First, the current market downturn really isn't that traumatic -- at least not yet. It could easily get much, much worse. And second, if you look back over the long-term history of the stock market, even the deep bear markets during the Great Recession and the dot-com bubble look like small blips along a steady upward path.
Corrections and bear markets are simply a part of investing, and they always have been. If you haven't experienced a "good" bear market, trust that the downturn so far in 2025 is, relatively speaking, a non-event. But if you stay the course and invest for the long term, even through really deep downturns, history suggests that you'll end up doing just fine.
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