Table of Contents
What is a stock market correction?
How long market corrections typically last
Historical examples of market corrections
Stock market correction vs. bear market
What happens to your portfolio during a correction?
FAQs about stock market corrections
Jun 21, 2022
·
6 min read
A stock market correction is a temporary decline in the value of an index or the price of an individual asset, typically 10% to 20% down from a recent market high.
When the stock market rises steadily for several months or longer, investors might start wondering when a so-called correction is due. “Stock market correction” is a term used to describe a stock market index's fall from a recent high. Seeing a portfolio value tumble can put any investor on edge, but these slumps occur frequently and are a normal part of long-term investing. Understanding what market corrections are and why they happen can help investors manage their portfolio during these times.
A stock market correction is a temporary decline in the value of an index or the price of an individual asset. Investors often use this term when an index falls between 10% and 20% from a recent market high. That’s where the “correction” part comes in: The drop often returns the index or security to what investors believe is its true long-term value.
also experience ups and downs, usually with more volatility. When a stock reaches a yearlong high of $100 per share, for example, a correction would occur if the stock price falls to between $90 and $80.
Investors have a lot of terms for describing market activity. Although there are no hand-and-fast rules about market terms, a correction differs from a dip, which is a small, brief market downturn, and from a market crash, in which stock prices fall sharply on a single day or week. Then there are bear markets, when stock prices experience a larger, more sustained decline of at least 20%.
The reasons for a one-day drop may vary, but a market correction is usually triggered by an event such as a slowing economy or fear in the market. For instance, investors tend to chase returns or follow trends, which can help push stock prices up. But as this happens, some investors may decide to sell in order to turn a profit while the price is high. This can cause the stock price to drop temporarily, which may result in a correction. This can also happen on a larger scale as confidence in the market wanes.
Stock market corrections may also happen when the economy starts to slow and companies earn less, or when investors get spooked by matters out of their control. For instance, expectations of rising interest rates or inflation, political uncertainty, trade wars, and global health concerns can cause fearful investors to avoid the stock market or sell stocks in favor of safer assets.
Market corrections tend to be short-lived, but it’s impossible to predict how long one will last. The S&P 500 index has experienced 27 corrections since 1945, and the average stock market correction lasted about four months. But the market doesn’t always rebound right away. Three of the S&P 500 corrections between 2000 and 2019 transformed into a bear market, or a stock index drop of 20% or more, while another turned into a recession. The other declines eventually returned to bull markets.
While the frequency of market corrections depends on factors like investor sentiment and the overall economy, historical data show these slides happen about every 16 months. Some last only a few weeks, while others are longer and more memorable.
In 2018, the S&P 500 dropped at least 10% in the first quarter of the year and again in the fourth quarter amid political dysfunction, a global economic slowdown, and other concerns. Nasdaq and Dow Jones also experienced corrections.
Concerns over the economic fallout of the Covid-19 pandemic interrupted a historic bull market in February 2020. Within the following month, the Dow, Nasdaq, and S&P 500 all experienced market corrections and then declined into bear-market territory.
In both cases, those indexes rebounded within a few months and went on to set new records.
The difference between a correction and a bear market is the length and depth of the decline. Every market correction is different, but the stock index typically declines between 10% and 20% for a period of about three to five months.
Bear markets start when the index declines by more than 20%. Since World War II, bear markets have lasted 14 months on average, and the S&P 500 index has fallen an average of 33% during those downturns. Bear markets last longer than corrections because they’re usually the result of a genuine economic issue rather than investor anxiety or a temporary disruption.
During a stock market correction, the value of portfolios will drop if investments are tied to stock market indexes such as the S&P 500 or Dow Jones Industrial Average. But because every investor’s portfolio is different, the exact change in holdings may be different from what’s going on in the index. So even if the Dow Jones falls by 10%, for instance, some portfolios may only go down 8% although others may decline 12%.
While some analysts have predicted when a stock market correction is coming,
they’ve also been wrong. For instance, the Dow Jones Industrial Average experienced steady gains between 2013 and 2018—and despite many predictions of an impending market correction, there was no meaningful pullback during this time.
The takeaway? It’s impossible to know exactly where the market is headed at all times.
There really is no way to prepare for a market correction. Pulling out of the market every time investors anticipate a correction could backfire because they may predict more than actually occurs. If they move their money to cash, they could end up missing out on the best-performing days of the market and lower their long-term returns.
The short answer is no, although it’s impossible to predict when a bear market is on the horizon. Since 2000, four market corrections have transformed into bear markets. But a correction has a higher chance of turning into a bear market if significant underlying issues are influencing the market. For instance, fears over the real estate bubble helped push a market correction into a bear market in October 2007.
It’s fair to say a correction will happen at some point. History shows they have happened regularly in the past, and there is no reason to think they won’t happen again in the future. The great unknown is when, and no one really has the answer to that question.
At Titan, we are value investors: we aim to manage our portfolios with a steady focus on fundamentals and an eye on massive long-term growth potential. Investing with Titan is easy, transparent, and effective.
Get started today.
Disclosures
Certain information contained in here has been obtained from third-party sources. While taken from sources believed to be reliable, Titan has not independently verified such information and makes no representations about the accuracy of the information or its appropriateness for a given situation. In addition, this content may include third-party advertisements; Titan has not reviewed such advertisements and does not endorse any advertising content contained therein.
This content is provided for informational purposes only, and should not be relied upon as legal, business, investment, or tax advice. You should consult your own advisers as to those matters. References to any securities or digital assets are for illustrative purposes only and do not constitute an investment recommendation or offer to provide investment advisory services. Furthermore, this content is not directed at nor intended for use by any investors or prospective investors, and may not under any circumstances be relied upon when making a decision to invest in any strategy managed by Titan. Any investments referred to, or described are not representative of all investments in strategies managed by Titan, and there can be no assurance that the investments will be profitable or that other investments made in the future will have similar characteristics or results.
Charts and graphs provided within are for informational purposes solely and should not be relied upon when making any investment decision. Past performance is not indicative of future results. The content speaks only as of the date indicated. Any projections, estimates, forecasts, targets, prospects, and/or opinions expressed in these materials are subject to change without notice and may differ or be contrary to opinions expressed by others. Please see Titan’s Legal Page for additional important information.
You might also like
What Time Does the Stock Market Open and Close?
The global stock market is composed of stock exchanges around the world. Most of them are open to trade Monday through Friday during regular business hours in local time.
Read More
When Was The Stock Market Created?
The world’s stock markets serve as a clearinghouse for investors to come together to buy and sell shares, and also serve as a barometer of a society’s fears and hopes.
Read More
Dow Jones: Top Highs and Lows Since 1929
Markets tend to rise as the economy expands, the Dow is no exception, although it reflects periods of volatility, is the second-oldest U.S. market index still in use.
Read More
What Is a Bull Market? Definition, Overview & Characteristics
A bull market, or a bull run, is an extended period of rising stock prices. A bull market is the inverse of a bear market, which is a downward trending stock market.
Read More
Cash Management
© Copyright 2023 Titan Global Capital Management USA LLC. All Rights Reserved.
Titan Global Capital Management USA LLC ("Titan") is an investment adviser registered with the Securities and Exchange Commission (“SEC”). By using this website, you accept and agree to Titan’s Terms of Use and Privacy Policy. Titan’s investment advisory services are available only to residents of the United States in jurisdictions where Titan is registered. Nothing on this website should be considered an offer, solicitation of an offer, or advice to buy or sell securities or investment products. Past performance is no guarantee of future results. Any historical returns, expected returns, or probability projections are hypothetical in nature and may not reflect actual future performance. Account holdings and other information provided are for illustrative purposes only and are not to be considered investment recommendations. The content on this website is for informational purposes only and does not constitute a comprehensive description of Titan’s investment advisory services.
Please refer to Titan's Program Brochure for important additional information. Certain investments are not suitable for all investors. Before investing, you should consider your investment objectives and any fees charged by Titan. The rate of return on investments can vary widely over time, especially for long term investments. Investment losses are possible, including the potential loss of all amounts invested, including principal. Brokerage services are provided to Titan Clients by Titan Global Technologies LLC and Apex Clearing Corporation, both registered broker-dealers and members of FINRA/SIPC. For more information, visit our disclosures page. You may check the background of these firms by visiting FINRA's BrokerCheck.
Various Registered Investment Company products (“Third Party Funds”) offered by third party fund families and investment companies are made available on the platform. Some of these Third Party Funds are offered through Titan Global Technologies LLC. Other Third Party Funds are offered to advisory clients by Titan. Before investing in such Third Party Funds you should consult the specific supplemental information available for each product. Please refer to Titan's Program Brochure for important additional information. Certain Third Party Funds that are available on Titan’s platform are interval funds. Investments in interval funds are highly speculative and subject to a lack of liquidity that is generally available in other types of investments. Actual investment return and principal value is likely to fluctuate and may depreciate in value when redeemed. Liquidity and distributions are not guaranteed, and are subject to availability at the discretion of the Third Party Fund.
The cash sweep program is made available in coordination with Apex Clearing Corporation through Titan Global Technologies LLC. Please visit www.titan.com/legal for applicable terms and conditions and important disclosures.
Cryptocurrency advisory services are provided by Titan. Cryptocurrency trading is provided by Bakkt Crypto Solutions LLC ("Bakkt Crypto"). Bakkt Crypto is not a registered broker-dealer or a member of SIPC or FINRA. Cryptocurrencies are not securities and are not FDIC or SIPC insured. Bakkt Crypto is licensed to engage in virtual currency business activity by the New York State Department of Financial Services. Cryptocurrency execution services are provided by Bakkt Crypto (NMLS ID 1828849) through a software licensing agreement between Bakkt Crypto and Titan. Please ensure that you fully understand the risks involved before trading: bakkt.com/disclosures.
Information provided by Titan Support is for informational and general educational purposes only and is not investment or financial advice.
Contact Titan at support@titan.com. 508 LaGuardia Place NY, NY 10012.