Understanding What Constitutes a Market Correction

With the recent volatility in the stock market, we wanted to address what it means for the market to be “in a correction.”

A Correction in the Stock Market is when a drop or reversal of 10% occurs from the recent peak.

This is a relevant topic because the S&P 500, along with other indices, reached this correction level at the end of Q1 in 2025.

For example, in mid-February, the S&P 500 reached a high of 6,147 and then closed at 5,521 in mid-March. This equates to a 626 point or a 10.18% drop in this broad market index.

We are referencing the S&P 500 index because it is a common benchmark/index for the overall market. While any specific company or index could reach “correction” levels, we normally hear the “Stock Market is in a correction” when a broad market index reaches these levels.

Distinguishing Between a Correction and a Bear Market

It is important to note that a correction is only one terminology for a market pullback and another common phrase is Bear Market.

A correction can turn into a bear market when it reaches the threshold of a 20% drop. While this may seem like a minor difference in phrases, we believe the implications, both financially and emotionally, reach more drastic extremes when we hit the bear market level.

These types of pullbacks can be somewhat common, with a total of 27 market corrections and 6 bear markets since 1974. That is a market correction just about every other year and a bear market 8 years on average.

For a deeper dive into how this contrasts with a bull market, where optimism and rising prices take the lead, feel free to check out our related article: Bull vs. Bear Market: What’s the Difference?

Investor Opportunities During Market Pullbacks

However, not all of these types of market patterns are bad. We believe the silver lining in these pullbacks is that they allow investors to buy into the market at lower prices. It may also present investors with an opportunity to rebalance their portfolios while potentially triggering a smaller amount of capital gains.

Both of these strategies could possibly be beneficial courses of action while the market is at lower prices. It is important to note that every correction in the past, and every bear market, has eventually recovered and led to new highs afterwards.

For example, despite all the headwinds we faced during the doc.com bubble, the financial crisis, and the COVID crash, the market was at all-time highs before this recent pullback. This means that, even though all the major pullbacks might have taken quite some time, the S&P 500 index was able to recover and push on to new highs.

What Should You Do During a Market Correction?

While no one knows what the future may hold, we are confident in our in-house, actively managed portfolios. Using 3rd party independent research, we review the data we subscribe to as well as our outlook and holdings on a daily basis.

This potentially may allow us to reduce risk or fully exit the market before a big downturn. While we are not going to be able to avoid every market pullback, we are confident that our process does remove a bit of volatility from our portfolios and can potentially lead to a smoother, longer-term investment experience.

We believe it is important not to sit on the sidelines during the up periods of the market, but we also believe that avoiding the market downturns, whether big or small, can help our client’s accounts compound more growth over time.

What is a Stock Market Correction: Key Takeaways

A Correction in the Stock Market is when a drop or reversal of 10% occurs from the recent peak.
While any specific company or index could reach “correction” levels, we normally hear the “Stock Market is in a correction” when a broad market index reaches these levels.
Historically, there have been plenty of corrections, but the overall market has continued to prove resilient and ultimately rise to new highs afterwards.

Speak With a Trusted Advisor

If you have any questions about your investment portfolio, retirement planning, tax strategies, our 401(k) recommendation service, or other general questions, please give our office a call at (586) 226-2100. Please feel free to forward this commentary to a friend, family member, or co-worker. If you have had any changes to your income, job, family, health insurance, risk tolerance, or your overall financial situation, please give us a call so we can discuss it.

We hope you learned something today. If you have any feedback or suggestions, we would love to hear them.

Sincerely,

Zachary A. Bachner, CFP®

with contributions from Robert Wink, Kenneth Wink, James Wink, and James Baldwin

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