Over time, markets get ahead of themselves. Excitement over AI, green energy, or whatever the next big thing is tends to push stock valuations far beyond what fundamentals justify. Accordingly, more often than not, a correction can be the catalyst that brings valuation discipline back into the discussion. Think of it as the market taking a deep breath.
To start off, we can define a correction as a decline in the S&P 500 index of 10% or more from its most recent high. If the drawdown reaches 20% or more, then it's not just a correction; it's considered a bear market. Using the SPDR S&P 500 ETF Trust as a proxy, we can see that deep drawdowns have occurred on a regular basis since the early 1990s.
If you're heavily invested in tech stocks, you've surely heard concerns that we may be approaching (or in) a bubble. Similar to the dot-com bubble in the late 1990s and the housing bubble in the early 2000s, tech stocks are on fire, and some bears believe they are overheated today. Is that true? I think the concern is overstated, but it's also important to acknowledge that markets sometimes drop. Corrections are nothing new and are, in fact, part of the heartbeat of the stock market.
