The last four weeks have served as a needed reminder that the stock market wouldn’t be a market without the ability for equities to move in both directions.

Following an impressive two-year rally in the age-old Dow Jones Industrial Average (^DJI 1.65%), benchmark S&P 500 (^GSPC 2.13%), and growth-powered Nasdaq Composite (^IXIC 2.61%), Wall Street’s three major stock indexes have hit the skids. Between Feb. 19 and Mar. 13, the Dow, S&P 500, and Nasdaq respectively fell by 8.6%, 10.1%, and 13.7%. The double-digit percentage declines for the S&P 500 and Nasdaq Composite placed both indexes firmly in correction territory.

When stocks begin taking the elevator lower, it leads investors to make educated guesses about where the bottom might be. While this isn’t something that can be answered ahead of time with any concrete accuracy, there are a trio of catalysts that point to additional downside for the Dow, S&P 500, and Nasdaq.

A twenty dollar bill paper airplane that's crashed and crumpled into a financial newspaper.

Image source: Getty Images.

The Dow Jones, S&P 500, and Nasdaq Composite are likely headed lower

Wall Street’s No. 1 enemy tends to be uncertainty. The further investors can look out and piece the puzzle together, generally the happier they are -- even if the news isn’t always positive. At the moment, nothing is causing more consternation on Wall Street than President Donald Trump’s tariff policy.

The president aims to use tariffs as a bargaining tool to protect American jobs and make domestic goods more price-competitive. While this might be effective for finished products, tariffs on inputs, which are goods used to make finished products, are likely to make some U.S.-manufactured goods even pricier.

Worse yet, President Trump’s take on tariffs can change by the day. Implementation dates, as well as which goods are subject to tariffs, have been adjusted multiple times since he took office. As long as tariff uncertainty persists, there’s reason to believe the Dow, S&P 500, and Nasdaq Composite can head lower.

Secondly, the Federal Reserve Bank of Atlanta’s GDPNow forecast is calling for first-quarter gross domestic product (GDP) to decline by 2.4%, based on its Mar. 6 update.  In roughly five weeks, the Atlanta Fed has reduced its GDP forecast from nearly 4% growth to what would equate to the steepest quarterly GDP decline, outside of the COVID-19 pandemic, since 2009.

Although the stock market and economy aren’t tethered, an economic contraction would logically be expected to adversely impact corporate earnings, and eventually weigh on equities.

The third catalyst that can push the Dow Jones Industrial Average, S&P 500, and Nasdaq Composite lower is valuation. Despite official corrections for the S&P 500 and Nasdaq Composite, this remains one of the priciest stock markets in history.

In December, the S&P 500’s Shiller price-to-earnings (P/E) Ratio -- this valuation tool is also known as the cyclically-adjusted P/E Ratio (CAPE Ratio) -- hit a peak of 38.89 during the current bull market cycle. This is more than double the average Shiller P/E of 17.22 when back-tested 154 years, and is it’s the third-highest reading during a continuous bull market. 

Not including the present, the five other times the Shiller P/E has topped 30 since January 1871 saw the Dow, S&P 500, and/or Nasdaq eventually lose at least 20% of their value. If history rhymes, all three indexes have further to fall.

A rapidly plunging then quickly rising candlestick stock chart displayed on a computer monitor.

Image source: Getty Images.

History is a pendulum that swings in both directions and undeniably favors optimists

To state the obvious, most investors aren’t big fans of unpredictability, volatility, and some of Wall Street’s most-influential businesses declining by a double-digit percentage over a relatively short time frame. But these declines are perfectly normal, healthy for the stock market, and ultimately inevitable. No amount of fiscal or monetary policy changes can keep stock market corrections from taking place.

While abnormally large daily declines in the Dow Jones, S&P 500, and Nasdaq Composite can be eyebrow-raising, what’s most important for investors to recognize -- and the key reason why they shouldn’t be worried about what’s transpired over the last four weeks -- is the nonlinearity of investing cycles.

Although stock market corrections, bear markets, and crashes are effectively the price of admission to Wall Street’s greatest wealth-creating machine, these events aren’t mirror images of bull markets.

In June 2023, the analysts at Bespoke Investment Group published a data set on social platform X that compared the length of every bull and bear market for the S&P 500 dating back to the start of the Great Depression (September 1929). This data set displayed a night-and-day difference between optimism and pessimism on Wall Street.

On one hand, the average bear market endured for 286 calendar days (around 9.5 months), with the longest S&P 500 bear market on record lasting for 630 calendar days in the mid-1970s. With few exceptions, big downdrafts in Wall Street’s broad-based index resolved rather quickly.

On the other hand, the average bull market stuck around for 1,011 calendar days, or approximately 3.5 times as long as the typical bear market. What’s more, 14 out of 27 bull markets, including the present bull market, have reached at least 630 calendar days in length.

The point being that while stock market corrections, bear markets, and crashes can be unnerving, they’re historically short-lived. In comparison, bull markets have a tendency to stick around for years and lift the Dow, S&P 500, and Nasdaq to new heights.

If given the proper amount of time, every stock market correction has proved to be a surefire opportunity for patient investors to put their money to work at a discount on Wall Street.