What is a market correction? It’s one of the only certainties that you can expect when discussing the stock market. After the market has risen steadily for a certain period of time, experts will eventually begin discussing when it might take place. 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 to us, 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 be discussing 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.
What Is Meant by Market Correction?
There’s currently no distinct definition of a market correction. However, as we’ve already mentioned, most people believe that a correction has taken place 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 of time.
This is why 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 to be 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 sometime. 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, than you don’t sweat huge moves because you can recover.
The Likelihood of Experiencing a Correction
In general, the stock market enters a correction after a major shock or economic event takes place. 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 going on in the world. Not just 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 we’ve already mentioned, these corrections are a certainty when it comes to investing. Meaning that they will occur relatively often.
What Causes a Market Correction?
From a young age, most of us are taught to deeply consider the decisions that’ll have a significant impact on 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. There are various factors that can result in a market correction.
For example, long-term unemployment or loan defaults often cause investors to take a step back and consider 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. In fact, many owners start adjusting other aspects of their financial plan in an attempt to reduce the need for this to occur. Safe havens like precious metals are here just for such occasions. Safe havens protect your investment portfolios in tumultuous times.
How Long Do Market Corrections Last?
As we’ve already mentioned, corrections are referred to as ‘correction’ due to the fact that they are not permanent. In fact, they’re only supposed to last for a certain period of time. If they exceed this timeframe, they become extended corrections or bear markets. So what time frame should be looking at?
In general, market corrections can last anywhere from a few weeks to a few months. Since the end of World War 2, S&P 500 corrections take an average of roughly 4 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 that took place between February and March in 2020 lasted only 3 months. On top of this, the correction that took place that September lasted a total of 3 weeks.
We already know that market corrections take place after a major event takes place. 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, a total of 5 market corrections turned into bear markets, meaning that they did not return to their long-term values.
What’s the Difference Between a Correction and a Bear Market?
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 of time, experts begin referring 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 that 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 changes to the economy.
However, bear markets occur when significant issues that can result in a deep economic crisis take place. It’s important to note that market corrections can turn into bear markets if more significant changes begin influencing the economy.
A market correction reflects a drop in value in stocks. This usually occurs due to major economic changes or world events. Investors tend to take a step back and consider what their options are during these periods. While they can cause plenty of stress for stock owners, market corrections usually only last a few weeks or months.