As the Russian invasion rages in Ukraine, the stock market here at home has been volatile. The S&P 500, for example, fell nearly 10 percent last week from its January 3 high. You may have seen financial analysts on television referring to the decline as “market correction territory.” But what exactly is a market correction?
A market correction is a decline of 10 percent or greater in the price of a security, asset, or financial market, as a result of massive sell-offs by investors and traders. Market corrections can last as little as hours, or as long as months. There are many reasons why the market falls into correction territory, and it happens more often than you think.
Over the last decade, the S&P 500 fell into correction 18 times with varying lengths. In March 2020, following the coronavirus hitting American soil, the market tanked into correction and ended in what’s called a “bear market.” A bear market occurs when the market decline exceeds 20 percent. Bear markets differ from market corrections, as they represent a more significant change in sentiment among investors.
In 2008, as Americans faced a great recession and crumbling housing market, the bear market lasted over 400 days as the S&P 500 fell over 51 percent. In March 2020, markets fell 33 percent, resulting in a bear market for 33 days.
Market corrections and bear markets are inevitable. In fact, smaller corrections actually help prevent larger economic collapses that could lead to a recession or depression. Knowing the terminology will help you decipher market jargon and help you navigate economic hiccups.