ASX 200 nears correction territory: What history predicts next

The S&P/ASX 200 briefly entered correction territory this week, dropping just over 10% on Wednesday, March 12, from its February 2025 all-time high. This aggressive selloff has been swift, with the index higher in only five of the last twenty sessions, pushing it down as much as 10.2% from the record close of 8,615 on February 14.

While the market appears deeply oversold, and while it may be primed for a short-term bounce, significant concerns remain. President Trump's tariffs have cast a shadow over near-term U.S. and global economic growth prospects, which is particularly troubling given growth was already showing signs of deceleration.

The pressing question right now is of course – what's next for the stock market?

Post-correction returns

Market corrections are a frequent occurrence, often serving as a healthy reset that paves the way for more sustainable gains over the medium term. Since 2000, the ASX 200 has undergone 15 corrections, and the forward returns tell a compelling story about why buying the dip can be a smart move.

Source: Market Index

In terms of averages, the forward returns are positive across all time frames.

Source: Market Index

What could go wrong?

While forward returns may be compelling – every situation is unique and comes with its own set of risks.

One of the key drivers for forward returns is whether or not the economy enters a recession. Some of the dates that have underperformed generally coincide with global recessions and/or periods of significant economic uncertainty.

• 2000: Australia was in a growth phase, supported by a mining boom precursor and post-Asian crisis recovery. Globally, the Dot-Com Bubble was bursting, but the U.S. recession didn’t start until March 2001.

• 2001: Australia avoided a recession post-9/11, aided by strong commodity exports and fiscal stimulus. The U.S. entered a recession from March to November 2001, marking a global downturn.

• 2007: Australia was booming due to China’s commodity demand. Globally, this was the eve of the Global Financial Crisis, but the U.S. recession didn’t begin until December 2007. This sell-off was a warning sign, not a recessionary event, yet.

• 2008: Australia avoided a recession during the GFC, thanks to stimulus and China’s demand. Globally, the U.S. recession officially started in December 2007, escalating in 2008. This date sits in the early GFC phase, with markets reflecting global distress.

• 2011: Australia remained in growth mode, supported by mining exports. Globally, no recession occurred, though Europe’s debt crisis intensified, and the U.S. recovery was sluggish, leading to market volatility.

Looking at the current landscape, the U.S. has put forward over US$770 billion in proposed tariffs — seven times the amount implemented in 2018–19 — and the escalation doesn’t end there. The market is awash with a steady stream of tit-for-tat tariffs, with recent headlines highlighting President Trump’s threat of a 200% tariff on all EU wines and alcoholic products if the bloc refuses to drop its recently implemented whiskey tariff.

According to UBS, a 25% tariff would shave 30 basis points (bps) off China’s growth, 53 bps from the Eurozone, and 60 bps from Japan, while Canada and Mexico could see a far steeper hit, losing 3.2–3.4 percentage points. This kind of impact could easily tip some major economies into negative growth.

The real question is where these tariff wars will lead next. With trade tensions and uncertainty surrounding President Trump’s policies showing no signs of fading, we’re left with a market primed for volatility and sharp, whipsaw-like swings. However, if the economy can hold steady, history might repeat itself, turning the current drawdown into an opportunity for longer-term investors to add to their positions.