Market corrections are an inevitable part of investing. Since 1950, there have been 52 instances where markets have dropped by 10% or more, a phenomenon known as ‘correction territory’. While volatility can be unsettling, history reassures us that these events are both normal and frequent. However, this cycle presents a unique challenge with far-reaching implications—the wealth effect.
Stock market holdings in the US surged to an unprecedented $56 trillion in 2024, fuelled by strong liquidity and bullish investor sentiment. Equities now account for over 43% of household net worth, making corrections more impactful than ever. A 10% drop in the S&P 500 has already wiped out household wealth equivalent to 12% of GDP. Historically, such a wealth shock has only occurred 12 times since 1950, often coinciding with or leading to recessions.
While market corrections are routine, their broader consequences deserve attention. With the top 10% of income earners responsible for half of US consumer spending, a downturn in wealth could trigger ripple effects across the economy. Investors should remain vigilant as the long-term implications unfold.
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