A stock market correction is when the value of an index declines 10% or more from its most-recent high. • On average, a correction in the U.S. stock market occurs about every two years, and generally takes three months to recover. Despite the panic they tend to cause, stock market corrections are necessary for the health of the overall market.
Despite the alarm often triggered by stock market corrections, they aren’t typically tied to major economic crises and are actually quite common. On average, U.S. stock market corrections occur about every two years. It’s a good thing, too, because they are necessary for the health of the market. Without the occasional pullback, stocks become overpriced or inflated, and a bull market swells to a bubble that eventually bursts — resulting in a sudden decline across broad sections of the market (known as a stock market crash). And a crash is far more likely than a correction to lead to a bear market (which is when equity prices decline 20% from a recent high). The correction that occurred in August 2015 was unusual in that it had been four years since the last one occurred — double the average timespan between corrections.
Despite the panic the recent pullback caused, it was actually just what the market needed — because a correction can be viewed as a defense against more profound trouble. Plus, savvy investors can treat the relatively cheap stock prices caused by a correction as a buying opportunity.
What to do in a stock market correction
What should you do if markets contract by 10% from recent highs? Just wait. And if you overreact by selling your investments, you could miss out on gains when the market bounces back. Remember, a correction is just the act of making something better.