What is a market correction? It’s one of the only certainties you can expect when discussing the stock market. After the market has risen steadily for a certain period, experts will eventually begin discussing when it might occur. When a stock index falls by more than 10%, it’s said to have entered a market correction. While this may sound like a relatively neutral term, it can be an extremely nerve-wracking time for investors.
For this reason, if you’re looking to invest in stocks, you should learn more about these corrections and what they entail. In this article, we’ll discuss exactly what a market correction is and a few major causes behind this event. More so, we’ll mention how long corrections last, making it easier for you to prepare for them in the future.
Table of Contents
Stock Market Correction Introduction
There’s currently no distinct definition of a market correction. However, most people believe a correction occurs once a stock index falls between 10% and 20%.
In the past, these stocks have returned to their longer-term value within a certain period.
Experts refer to these events as corrections and not bear markets. However, it’s essential to remember that market corrections are only temporary.
If a drop in value lasts longer than the expected timeframe for a correction, it’s considered a bear market. More often than not, when the market moves down, it’s back up pretty quickly.
We haven’t had a stock market crash for quite some time. We’re lucky that way. And if we have another Black Monday, we know how to trade in any direction. If you can trade in any direction, you don’t sweat huge moves because you can recover.
Likelihood of Experiencing One
Generally, the stock market enters a correction after a major shock or economic event occurs. This prompts investors to pause and consider what they want their next move to be.
During this time, they’ll also think about what’s happening worldwide, not just in the US but the world as a whole, as this also has a massive impact on the stock market of any country.
Experts see a market correction as an indication of a potential reset. As mentioned, these corrections are a certainty when investing, meaning they will occur relatively often.
What Causes a Market Correction?
From a young age, most of us are taught to consider deeply the decisions that will significantly impact our lives.
This principle is of utmost importance to investors who spend money on the stock market.
Before making any life-changing moves, investors need to understand current economic developments. In other words, don’t panic sell. Various factors can result in a market correction.
For example, long-term unemployment or loan defaults often cause investors to reconsider their options. In the case of a single stock, a bad earnings report can have a major impact on the investment index.
If certain changes that are affecting the broader stock market have occurred, it may indicate that you should start preparing for an extended market correction. This could also result in a bear market, which we’ll discuss below.
However, this doesn’t mean that you should start selling assets. Many owners start adjusting other aspects of their financial plan to reduce the need for this. Safe havens like precious metals are here just for such occasions. Safe havens protect your investment portfolios in tumultuous times.
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How Long Do Market Corrections Last?
As mentioned, corrections are called ‘corrections’ because they are not permanent. They’re only supposed to last for a certain period. If they exceed this timeframe, they become extended corrections or bear markets. So, what time frame should we be looking at?
Market corrections can generally last anywhere from a few weeks to a few months. Since the end of World War 2, S&P 500 corrections have taken an average of roughly four months to return to their usual long-term values.
However, it is essential to note that these corrections are never the same. For example, the Coronavirus market correction lasted only three months between February and March 2020. On top of this, the correction that took place in September lasted three weeks.
We already know that market corrections occur after a major event. Once the shock of this event has run its course, stock markets tend to recover and return to their normal values. However, this is not always the case. For example, since the mid-1970s, five market corrections turned into bear markets, meaning they did not return to their long-term values.
Correction and Bear Market Differences
As we have already discussed, a market correction lasts anywhere from a few weeks to a few months.
Once a correction exceeds a certain period, experts refer to it as a bear market.
So, what exactly is a bear market? Bear markets are much longer declines in value when compared to corrections. More so, they reflect a much deeper decline in value.
Corrections show a decline in stock value between 10 and 20%. On the other hand, bear markets can be anywhere from 20% upwards, meaning owners experience an even bigger loss.
Bear markets are the result of more significant changes in sentiment amongst investors. Corrections usually occur when investors experience slight concern over world events and economic changes.
However, bear markets occur when significant issues can result in a deep economic crisis. It’s important to note that market corrections can turn into bear markets if more significant changes begin influencing the economy.
Final Thoughts
A market correction reflects a drop in the value of stocks. This usually occurs due to major economic changes or world events. Investors tend to step back and consider their options during these periods. While they can cause plenty of stress for stock owners, market corrections usually only last a few weeks or months.
