What Is a Market Correction? Definition, Examples & Impact

What Is a Stock Market Correction?

A market correction is said to have occurred when the stock market—as gauged by a major index like the S&P 500—falls in value by between 10 and 20 percent after an uptrend or period of stability. A decline of over 20 percent that lasts for a significant period is considered a bear market, which is more severe than a correction.

Note: Market corrections are not to be confused with asset corrections, which occur when a single security (e.g., Apple stock or Bitcoin) falls by 10 or more percent independent of the market at large.

What Causes Market Corrections?

At a basic level, stock market corrections occur when there are more sellers than buyers for most stocks for a significant period of time. But what causes this shift toward higher supply and lower demand in the equity market?

Generally, a shift from optimism (or greed, if you prefer) to fear entices investors to sell their positions and move their money toward safer, more stable assets like cash or bonds. This sort of widespread investor fear can occur when it seems like the economy might be headed for trouble. For instance, things like supply chain issues or hikes in the fed funds rate can trigger selloffs.

A major crisis in a particular industry (like the bursting of the dot-com bubble in the early 2000s or the mortgage-backed security crisis of 2007– 08) can also cause a ripple effect that can snowball into a market-wide correction, a bear market, or even a recession.

Similarly, big-picture issues like the COVID-19 pandemic or international military tensions can trigger market fear and lead to corrections. Each case is different, and the cause or causes of a market correction can usually only be identified in hindsight.

How Often Do Market Corrections Occur?

Market corrections aren’t like birthdays or solstices—they don’t occur at regular intervals, and they can be hard to predict.

That being said, per the data in the table below, there were 14 market corrections between 1990 and 2021, only three of which became severe enough to be considered bear markets. The average interval between corrections was 673 days, but these intervals ranged wildly. The nearest corrections were a mere 49 days apart, while the farthest were a whopping 2,553 days (about 7 years) apart.

A Timeline of U.S. Market Corrections 1990–2020

How Long Do Market Corrections Last?

Not only can we not predict how frequently market corrections might occur; we also can’t say with any degree of certainty how long they will last.

That being said, per the data in the table above, the average length of market corrections (including those that turned into bear markets) between 1990 and 2021 was 163.5 days (between 5 and 6 months), but these lengths varied significantly. The shortest correction lasted only 13 days, while the longest lasted 929 days (about 2.5 years).

Can Market Corrections Be Predicted?

As mentioned above, market corrections are very difficult to predict, but that doesn’t stop investors and analysts from attempting to do so. The stock market is extremely emotion-driven, so a few talking heads expressing bearish sentiments can quickly lead to a panic among investors.

That being said, for every bearish analyst, there is likely to be a bullish one who reads the exact same tea leaves in a different way. For the average investor, attempting to time corrections, selloffs, or bear markets is usually an exercise in futility.

Rather than trying to make risky predictions based on news, tips, or analysis, most casual investors would do well to remember that while the market does experience volatility and even extended dips, it tends to move upward in the longer term. Passive investing strategies like dollar-cost averaging can help investors reduce the effects of volatility on their portfolios and can be a good way to cut out the noise in the market while focusing on value and steady, long-term growth.

Is It a Good Idea to Buy Stocks During and After a Market Correction?

Corrections can be scary, and many less-experienced investors may be tempted to stop putting money into the market (or even take their money out of the market) as prices decline. Unless cash funds are needed for an unexpected emergency, this is not usually the right move.

Say an investor has a steady income, and they typically dedicate 5 percent of it to investing each month. Were they to sell their holdings during a period of decline, they might lock in their losses, whereas if they kept their money in the market, their holdings would likely go back up in value eventually. Similarly, if an investor left their money in the market but stopped investing during a correction, they might miss the chance to lower their average cost for their favorite holdings.

Again, dollar-cost averaging can be useful here. When using this strategy, an investor always invests the same amount of money into a stock (or fund) at regular intervals, so when the stock is cheaper, they buy more of it, lowering their average cost. This way, when values rise again, their gains will be larger than they would had they pressed pause on investing out of fear.

In short, investors seeking long-term, steady returns tend to do better by continuing to invest during and immediately after corrections.

Do Cryptocurrencies Experience Market Corrections?

Yes, corrections can occur in any financial market. Cryptocurrencies are notoriously volatile—more so than equities overall—so corrections are common occurrences in both individual crypto projects and the crypto market at large.

How Do Stock Market Corrections Affect Bonds?

Since the bond market tends to be more stable than the stock market, many investors move money into bonds during corrections or other periods of high volatility, so when the value of stocks drops for whatever reason, the value of bonds often goes up.