As February came to a close, the markets finally made their long-overdue correction. Now, as March ends, we are left wondering—could this correction potentially lead to a recession?
The Chart of the $QQQ Nasdaq 100 ETF above, illustrates where the $QQQ crossed into correction territory. It also shows a possible bear flag forming
Understanding Market Corrections and Bear Markets
First, let’s explore what a market correction is. A correction is defined as a decline of more than 10% from the market’s most recent high. Based on this definition, we are now officially in correction territory.
Next, let’s define a bear market. A bear market is characterized by a decline of more than 20% from the market’s high and is further defined as a prolonged downturn in stock prices and market indices. Given this, we can clearly state that we are not yet in a bear market—let alone a recession.
Nonetheless, discussions about a potential recession in the U.S. economy are increasing. So, what exactly do we mean when we use the term “recession”?
What Defines a Recession?
A recession is defined as a substantial, far-reaching, and persistent economic downturn. A common rule of thumb is that two consecutive quarters of negative gross domestic product (GDP) growth indicate a recession. However, the U.S. economy is still growing, meaning we are nowhere near entering a recession at this point.
Putting It All into Perspective
The markets, which have been performing exceptionally well for several years, have now corrected. From a technical standpoint, this is a healthy development. Markets were extended beyond their historical averages. Some sectors, particularly in technology—such as artificial intelligence and semiconductors—had been inflated by hype over their future potential.
So yes, the market needed a break. This pause could set it up for future growth, but for now, the correction was necessary. This type of correction occurs through both time and price adjustments.
What to Watch for in the Future
If the markets continue sideways or decline further into bear market territory, then concerns about a potential recession would become more valid. However, as of now, we are not even in a bear market, so there is no reason to skip a step and immediately worry about a recession.
What Triggered the Correction?
One key factor influencing the market correction is government spending. The U.S. federal government is the largest employer in the country, with 2.7 million employees, according to Largest.org. When the largest employer in the U.S. begins cutting costs and analyzing efficiency, the effects ripple through the overall economy—especially in stock markets, which are generally forward-looking.
Additionally, the Trump administration has reshaped U.S. trade policies, using tariffs as a negotiation tool. Uncertainty surrounding tariffs and at times contentious trade negotiations have dampened financial markets that had become overly confident. Although most tariffs have yet to take effect, the mere expectation of these changes has impacted the markets and led to this much-needed correction.
Final Thoughts
Until next month, it is best to remain cautious. We are currently in a market correction—but not a bear market or recession. As always, trade well.
Written by Michael DiGioia, Director of Education
Mike is available for One-on-One Coaching. Learn More
