Some Correction Guesses?

If economic momentum continues to weaken, investors may finally show greater signs of capitulation and “act” more fearfully, establishing a stronger launch pad for the next leg of this bull market.

After formally entering a “correction” (a decline of at least 10% from a record high), the S&P 500 Index posted a sizable 2.6% bounce from its correction low last week (chart 1). Every investor is now forced to ask themselves, “Is this it”? Is the stock market swoon finally over allowing the Bull to reestablish control?

The answer is “Who knows”? Corrections are notoriously difficult to accurately predict or time. I certainly don’t know for sure whether this correction will still evolve into a bear market (a decline of 20% or more), spend more time in correction mode perhaps falling yet deeper into correction territory (ultimately declining between 10% to 20% from its recent high), or whether last week’s bounce did in fact end this period of stock market turbulence.

While I have no answers, I do have a few guesses. I think a U.S. recession is unlikely in 2025 primarily because both the business and household sectors are too financially healthy – both boast strong balance sheets, rising profit and earnings streams, and possess ample safe-haven liquidity. Nonetheless, most likely, the U.S. economy is headed for a pronounced slowdown this year – probably forcing real GDP growth to slightly less than 2% by year end. Economic policies have been contractionary in the last year including a major rise in bond yields, an oppressive increase in the U.S. dollar, money supply growth which remains insufficient to support the current pace of nominal GDP growth, a modest rise in inflationary pressures in recent months, and a President bent on tariffing his way to prosperity.

Nonetheless, without a recession, a bear market –while always possible – is unlikely. Since the odds of a bear market are low and considering the S&P 500 has already cheapened by about 10%, investors could reasonably decide to stop worrying much about any remaining correction difficulties and begin investing today for another leg higher in this bull market. While I have no problem with this advice, “my guess” is this correction is not yet over. While I don’t expect a 20%+ drop in the S&P 500, it would not be surprising if it takes several more weeks or perhaps months before the stock market is again setting new record highs. I recommend keeping cash at a minimum and staying mostly fully invested near your individualized maximal equity weighting, but I would also keep equity positions tilted a bit more conservatively. If I am wrong and the stock market is now headed imminently to new highs, you will at least be fully invested. And if it does take longer before this correction finds its final low, then a more conservative investment tilt will buffer the waiting period.

What follows is a pictorial and commentary of some of the major items keeping me cautious and “guessing” this stock market correction may still get a bit worse and last a bit longer.