Stock Market Crash or Correction? What History Says About the Selloff

The Dow Jones has dropped 16% since January 2025, the S&P 500 is on the verge of a bear market, and investors are in a frenzy, unsure if this is a big crash or a regular correction. While the headlines are full of alarm, history can provide us with a road map for navigating this turbulence and even profiting from it. In this post, we’ll pull down the data, identify historical patterns, and explain if the 2025 selloff is a stock market crash or correction.

Read Finance Wizzy’s guide on costly mistakes all investors must avoid during market downturns.

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1. Stock Market Crash vs. Correction: The 20% Rule (And Why 2025 Breaks It)

A correction is a 10-20% drop from recent highs, while a crash goes over 20% in days or weeks. The S&P 500’s 18% drop in April 2025 is close to a crash, but it depends on what you’re looking at.

Corrections typically take 4 to 6 months, but disasters like Black Monday (1987) and the 2008 collapse occur far faster and deeper. “This selloff is unusual,” according to market historian Dr. Ellen Voss. “It is the result of algorithmic trading and geopolitical shocks, rather than a systemic issue. That indicates the correction could linger for a while, rather than a crash.”

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2. The 5 Warning Signs History Always Ignores (Until It’s Too Late)

Have you noticed that every major crash has some common signs? Like, super high stock prices, lots of people buying stocks, and interest rates going down. It’s like a recipe for disaster. In 2025, the Shiller P/E ratio went up to 32 (which is way higher than it was before 2008), and meme stocks started making a comeback.

Unlike 2000 or 2008, the economy today isn’t burdened by dot-com debt or subprime mortgages. Morgan Stanley’s chief strategist argues that this isn’t a crisis of fundamentals. Instead, it’s a shift in sentiment. The 2025 dip is similar to the ‘mechanical’ crash of 1987—painful but short-lived.

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3. How 1994, 2018, and 2020 Can Guide 2025

History has time and time again shown corrections are buying opportunities for patient investors, as they can yield high returns

• 1994: After a 9% Fed-induced correction, the S&P 500 rallied 34% in 12 months.
• 2018: A 19.8% Q4 drop reversed into a 29% gain by late 2019.
• 2020: COVID’s 34% crash rebounded 68% in 10 months.

Vanguard’s global CIO says that the best returns come when you buy when others are scared. In 2025, that means focusing on sectors like healthcare (which is flat this year) and industrials, both of which have historically bounced back quickly.

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4. The Hidden Risk No One’s Discussing: Behavioral Traps

Investors tend to lose more money by panicking and selling than by the actual crashes themselves. In 2008, those who held on to their investments managed to recover their losses by 2012, while those who sold at the wrong time suffered permanent damage.

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The 3-Step Plan Smart Investors Are Using Right Now

• 1. Triage Your Portfolio – Time to trim the fat from your portfolio. Sell off those “zombie stocks” like the tech IPOs that are losing money and companies that can’t seem to make ends meet.
• 2. Build a Recovery Basket – Find companies that are taking a temporary hit. Big names like Microsoft (MSFT) or UnitedHealth (UNH), which have dropped by 30% or more this year, could bounce back strongly.
• 3. Hedge with History – Protect your downside. Put 10% of your money into defensive or evergreens stocks like utilities and Treasury notes (TLT). These investments have a history of doing well during market downturns.

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Final Verdict: Crash or Correction? It Doesn’t Matter.

Since 1928, the S&P 500 has seen 26 corrections (more than 10%) and 5 crashes (more than 20%). All were followed by fresh highs, ultimately. The 2025 sell-off will be no different.

According to J.P. Morgan data, investors who remained fully invested during every downturn since 1995 achieved an annual return of 7.7%,and those who missed the ten best days only got 2.4%. Ultimately, is this a crash, or a correction? For smart investors, it is irrelevant. The only thing that matters is whether you’ll let history repeat itself for your benefit.

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