Market Correction
10-20% market decline from recent peak. Healthy and common—happens every 1-2 years. Not as severe as 20%+ bear market.
What You Need to Know
Market correction is a 10-20% decline from recent market highs. The term implies the market was "too high" and is "correcting" to fair value. Unlike bear markets (20%+ decline), corrections are shorter and less severe.
Correction statistics:
- Frequency: Every 1-2 years on average
- Duration: 2-4 months typically
- Decline: 10-15% average (sometimes reaches 20% before bouncing)
- Recovery: Often 3-6 months back to previous highs
Example: S&P 500 at 5,000 drops to 4,250 (15% decline) over 6 weeks, then recovers to 5,000 by month 4. Classic correction.
Corrections vs bear markets:
- Correction: 10-20% drop, quick recovery, often no recession
- Bear market: 20%+ drop, longer duration, often coincides with recession
What to do during correction:
- Nothing (if your allocation is right for your timeline)
- Rebalance (sell bonds, buy stocks on sale)
- Dollar-cost average (regular investments buy low)
- Review but don't panic
Trying to "get out before the correction" usually means missing the recovery. The best days often occur right after worst days.
Sources & References
This information is sourced from authoritative government and academic institutions:
- investor.gov
https://www.investor.gov/introduction-investing/investing-basics/glossary/correction
Related Calculators & Tools
Put your knowledge into action with these interactive tools:
Related Terms in Economics
Federal Funds Rate
Interest rate banks charge each other for overnight loans. Set by Federal Reserve. Controls all other interest rates—mortgages, credit cards, savings.
Inverted Yield Curve
Short-term bonds pay higher rates than long-term bonds. Recession predictor—has preceded every recession since 1950, usually by 12-24 months.
Prime Rate
Interest rate banks charge most creditworthy customers. Usually Fed funds rate + 3%. Credit cards and HELOCs tied to prime rate.
Recession
Economic downturn with declining GDP, rising unemployment, and reduced spending. Technically 2 consecutive quarters of negative GDP growth.
Stagflation
Stagnant economy with high inflation—worst of both worlds. Rising prices + high unemployment + no growth. Rare but devastating.
Yield Curve
Graph showing bond yields across different maturities. Normal = upward slope (long-term pays more). Inverted = recession warning.