What is a Market Correction? A market correction is characterized by a decline in stock prices of at least 10%.

Key Takeaways

• A stock market correction is typically defined as a decline of 10% or more from recent market peaks.

• Historically, the US stock market has consistently rebounded from corrections, as well as from less severe pullbacks and more significant downturns.

• Adhering to an investment strategy that considers your financial objectives, time frame, and risk tolerance can assist you in navigating corrections.

After experiencing a period of gains, an investment or a group of investments may enter what is known as correction territory. What defines a stock market correction, and what implications might it have for your investments? Below, we address common questions about stock market corrections.

What is a market correction?

Although there is no official definition, a stock market correction is typically recognized as a decline of at least 10% from recent market highs. Corrections can affect any type of investment, including individual stocks, bonds, commodities, or stock indexes. Indexes are collections of stocks that share a common characteristic, such as being large companies, exemplified by the S&P 500.

How does a market correction work?

A stock market correction has historically been a normal aspect of investing. Just as markets can rise, they can also decline. These periods of reduced values can last from days to months. Notably, the S&P 500, often used as a benchmark for overall market performance, has spent more than a third of the time since 1927 trading 10% or more below a recent high. Each time, the market has rebounded from these declines and continued to provide long-term gains, although past performance is not a guarantee of future results.

What Causes a Market Correction?

Numerous factors can contribute to a market correction, including the following:

News Headlines

Consider political news and global conflicts. For instance, uncertainty due to policy changes may lead investors to sell certain stocks and seek safer options, such as bonds or cash.

Economic Data

Indicators such as employment figures, inflation, or factory orders can influence market corrections. Investor sentiment also plays a role—regardless of the economic data. For example, concerns about unemployment, inflation, or consumer confidence might cause investors to fear an economic slowdown, prompting them to sell investments even if the data is not overtly negative.

Earnings Reports

Companies regularly issue earnings reports to update investors on their financial performance. When companies exceed expectations, their stock prices may rise, though not invariably. Conversely, if they underperform, stock prices may decline.

Stock Market Correction vs. Bear Market

While corrections and bear markets have similarities, they differ in several key aspects.

Similarities

• Both corrections and bear markets have historically been typical elements of investing.

• They can be influenced by investor reactions to news headlines, economic data, and company earnings.

• The precise timing of when corrections and bear markets begin and end is unpredictable.

• Historically, corrections and bear markets have concluded, followed by gains.

Differences

• A bear market, generally defined as a decline of at least 20%, represents a more significant drop than a market correction.

• Market corrections have historically been more frequent than bear markets.

• Bear markets tend to last longer than market corrections.

Stock Market Correction vs. Crash

A stock market crash is characterized by a sudden, severe decline. Notable crashes include the onset of the Great Depression in 1929, the dot-com bubble burst in 2001, the Great Recession in 2008, and the onset of the pandemic in 2020.

Similarities

• The timing of when a crash or correction begins and ends is unpredictable.

• Historically, the market has recovered and achieved long-term gains after a correction or crash.

Differences

• Crashes typically involve more rapid and severe declines than corrections.

• Crashes may, but do not always, precede a recession or depression.

• If a large number of investors attempt to sell simultaneously, exchanges may halt trading to prevent a crash or mitigate its impact. Such measures are not typically taken for a correction.

Duration of Market Corrections

Market corrections can vary greatly in duration, but on average, they have historically lasted 115 days, according to Yardeni Research, a consulting firm. It is crucial to recognize that a correction might develop into a bear market, which could extend for a longer period. Historically, however, markets have shown resilience and recovery. Despite nearly half of the years since 1980 experiencing a correction, the average annual return during this period has exceeded 13%.

Historical Instances of Market Corrections

In the accompanying chart, red dots denote significant declines from market highs, while green bars illustrate predominantly positive annual returns. Red dots in the -10% to -20% range indicate corrections, which have been observed in almost every decade. Notably, the S&P 500 and Nasdaq indexes entered correction territory in March 2025.

Below are some historical examples of market corrections:

Market Correction of March 2011

This correction followed an earthquake and tsunami in Japan.

Market Correction of February 2018

Concerns about inflation, interest rates, and the bond market led to a decline in shares in early 2018, although the correction lasted less than two weeks.

Market Correction of January 2022

Most major indexes, including the S&P 500, fell by more than 10% in the largest drop since the onset of the COVID pandemic in March 2020. At that time, the U.S. was dealing with the Omicron variant, inflation, and supply chain disruptions, with the Federal Reserve indicating potential interest rate hikes.

Strategies During a Market Correction

An effective investment strategy should consider your current financial situation, goals, time horizon for achieving those goals, and risk tolerance. The key is to adhere to this plan through market fluctuations, which can help mitigate emotional investing and prevent panic-selling at market lows, thus avoiding locked-in losses and missed growth opportunities. Consider these additional strategies for managing market volatility:

Build a Cash Reserve

Maintaining emergency savings ensures you may not need to liquidate securities to cover expenses in the event of income loss or unexpected bills. Fidelity recommends starting with $1,000 and then building up to cover 3 to 6 months of expenses.

Diversify Investments

Diversification involves investing in a broad array of assets across and within stocks, bonds, and short-term investments like money market funds to mitigate risk. By diversifying, you limit exposure to any single asset type, potentially smoothing your investment experience over time. Keep in mind that diversification does not guarantee gains or protect against losses.

Rebalance Your Portfolio

Maintain your target asset allocation through periodic rebalancing, which involves adjusting your investment holdings and their proportions. Without rebalancing, your portfolio's risk level may become misaligned with your goals and strategy.

Read more: A tactical guide to rebalancing your portfolio.

Regular Investment

While some investors view downturns as opportunities to purchase shares at a discount, another strategy is dollar-cost averaging. This involves investing a fixed amount at regular intervals, regardless of market conditions, ensuring consistent share purchases whether the market is up or down. This approach can alleviate the pressure of making spontaneous decisions that might be regretted later. You might already practice dollar-cost averaging in a workplace retirement plan like a 401(k), where a portion of each paycheck is deposited into an investment account. You can also implement this strategy in other types of accounts, such as a regular brokerage account.

Tax-Loss Harvesting

A declining market can present an opportunity to employ tax-loss harvesting in a taxable brokerage account. This strategy involves selling investments at a loss, which can offset gains and reduce taxable income. Selling profitable investments incurs taxes on those gains, but selling at a loss can provide a tax advantage.