Understanding Market Corrections – What You Need to Know
A straightforward look at how market corrections happen, what causes them, and how to stay on track when they do.
Making Sense of Market Corrections
A market correction is a drop of about 10% to 20% from a recent high—and they’re more common than many realize. Historically, the S&P 500 experiences a correction every 18 to 24 months, and in most cases, the market bounces back within four to six months.
What Do Corrections Look Like?
- Mild (10–12%) – Usually triggered by shifts in stock valuations.
- Standard (12–17%) – Often tied to interest rate changes or macroeconomic concerns.
- Deep (17–20%) – Can be caused by financial system stress or major global events.
What Typically Causes Them?
- Fed rate hikes
- Rising inflation
- Global tensions or conflicts
- Lower-than-expected corporate earnings
- Market running “too hot” (i.e., overvalued)
A Few Recent Examples:
- 2018 (-19.8%) – Trade war headlines
- 2020 (-33.9%) – COVID market shock
- 2022 (-25.4%) – Inflation spike and Fed rate hikes
How to navigate them:
During these periods, the most important thing is to stick with your investment strategy, stay diversified, and keep focused on your long-term goals. It’s easy to get caught up in dramatic headlines, but making impulsive moves often does more harm than good.
At the end of the day, getting through a correction is about having a plan, staying disciplined, and remembering that volatility is a normal part of investing.
Market downturns have occurred every year.
Source: Capital Group
