Loading the player...

What is a 'Correction'

A correction is generally defined as a ten percent or greater decline in the price of a security from its most recent peak. Corrections can occur in individual stocks, indexes, commodities, currencies or any asset that is traded on an exchange. An asset, index, or market may fall into a correction either briefly or for sustained periods of time, including days, weeks, months, or even longer.

BREAKING DOWN 'Correction'

Corrections can sometimes be projected using market analysis, and by comparing one market index to a similar market index. Using this method, an analyst may discover that an underperforming index may be followed closely by a similar index that is also underperforming. A steady trend of these similarly slowing indexes may be a sign that a market correction is potentially coming.

Prior to a market correction, individual stocks may still be strong, or even over-performing. Conversely, during a correction period, individual assets frequently perform poorly due to adverse market conditions. Corrections are often seen as ideal times to buy high-value assets at discounted prices for investors with available capital who are willing to take the risks involved.

Although market corrections can be challenging, and a 10 percent drop may be significant for many investment portfolios, corrections are sometimes considered healthy for both the market and for investors. For the market, corrections can help to readjust and recalibrate asset valuations that may have become unsustainably high. For investors, corrections can provide both the opportunity to take advantage of discounted asset prices as well as to learn valuable lessons on how rapidly market environments can change.

Market Corrections in the News

Market corrections occur relatively often. In February 2018, two major indexes, the Dow Jones Industrial Average (DJIA) and the S&P 500, both experienced corrections, dropping by more than 10 percent. Both the Nasdaq and the S&P 500 also experienced corrections in late October of 2018. Here is a chart of the S&P 500 highlighting the two corrections that occurred in 2018 (as of late October 2018).

Source: TradingView

Between 1980 and 2018, the U.S. markets experienced 36 corrections. During this time, the S&P 500 had fallen by an average of 15.6 percent. Ten of these corrections resulted in bear markets, which are generally indicators of economic downturns. The others remained or transitioned back into bull markets, which are generally indicators of economic growth and stability.

The average market correction is short-lived and lasts anywhere between three and four months. While this may not seem like a long time in the grand scheme of things, it is easy to see why casual investors may be worried by a 10 percent or greater downward adjustment to their assets during this period, especially if they are new to investing or it is the first correction they have experienced.

RELATED TERMS
  1. Technical Correction

    A technical correction is a decrease in the market price of an ...
  2. Accounting Changes And Error Correction

    Accounting Changes and Error Correction refers to guidance on ...
  3. Timing Risk

    Timing risk is the speculation that an investor enters into when ...
  4. Bear Market

    A bear market is a market in which securities prices fall and ...
  5. Composite

    A composite is a grouping of equities, indexes or other factors ...
  6. Force Index

    The Force Index is a technical measure of the market power behind ...
Related Articles
  1. Investing

    Why the Sell-Off Is a Correction, Not a Bear Market

    Despite fears that a bear market is underway, factors suggest no more than a temporary correction.
  2. Investing

    5 Stock Corrections Show More Pain Ahead

    The recent history of market corrections suggests that stocks have a longer road downward.
  3. Investing

    Stocks Face Miserable August as Correction Looms

    August has often been a rough month for stocks.
  4. Insights

    The Right Decision When a Market Correction Is Due

    Markets keep hitting record highs. How should investors prepare for an inevitable correction?
  5. Investing

    Why a 10% Stock Drop Will Feel Like a Bear Market to Investors

    Spoiled rich: Many investors are psychologically unprepared to deal with a long-overdue correction.
  6. Investing

    Why Severe 19% Correction Could Happen Like 1998

    This year has much in common with 1998, when techs led the market down by 19% in a few weeks.
  7. Trading

    Watch for Breakouts in These Stocks, Up or Down

    Sideways movement in these stocks indicates a time to take profits, or await a breakout which could be to the upside or downside. (MSFT,DE,Q)
  8. Investing

    3 Market Factors to Consider This Spring

    Here are a few things to consider when looking at the current state of the U.S. stock market.
Trading Center