What is a Market Correction and How Often Does it Occur?

Not only due to the typical chaos of U.S. President Donald Trump and the uncertainty caused by the threat of reciprocal tariffs, but also because of elevated valuations - especially among tech companies fueled by expectations of growing revenues from artificial intelligence, which sooner or later will require a valuation reality check - along with a slightly weakening U.S. economy, expectations of prolonged high interest rates, and persistent inflation, a minor market correction has arrived.

Let’s take a closer look at what a correction actually is, how often it occurs, and what can be done about it.

Market correction

A market correction is a decline in stock prices or the overall market of 10–20% from a previous peak. It is a natural part of the stock market cycle and is often considered a healthy adjustment of overvalued prices.

As noted in the first paragraph, market corrections usually have multiple causes, which together create negative market sentiment. This sentiment is then reflected in sell-offs or increased hedging through put options, both of which put downward pressure on prices and lead to declines.

Historical data shows that corrections in the stock markets are not uncommon. Since 1950, the S&P 500 index has recorded 36 drops of 10% or more, which means on average one significant correction every two years.

However, there are still smaller declines under 10% and larger drops over 20% to consider.

Declines under 10% are called pullbacks, which are essentially minor swings or natural price fluctuations within a regular market movement. Sometimes, they are simply referred to as small or mild corrections.

On the other hand, a decline of more than 20% is known as a bear market, a well-known and widely accepted term indicating a prolonged and significant downturn.

Frequency of Individual Corrections

Market corrections do not occur on a regular basis.

This makes sense — no one knows in advance what fundamentals will impact the markets.

However, significant corrections and bear markets are typically linked to deeper changes in economies, connected to economic cycles or global issues.

A correction of around 10% occurs every year to every two years. A bear market typically happens approximately every seven to ten years.

Let’s take a brief look at the reasons behind market downturns since the year 2000.

Causes of Market Downturns Since 2000

Every major market downturn since 2000 has had specific triggers, often a combination of economic imbalances, inflated asset prices, and unexpected black swan events.

• Dot-com Bubble (2000–2002):

The cause of this bear market was the technology bubble of the late 1990s. Investors had built up enormous expectations for internet companies, which drove stock prices to extreme levels. In March 2000, the bubble burst — a loss of confidence in overinflated valuations triggered massive sell-offs. The September 11, 2001 attacks further accelerated the decline. Overall, this led to a collapse of the technology sector, which lost most of its value.

The S&P 500 dropped approximately 49%, while the tech-heavy Nasdaq Composite plunged as much as 77%, making it one of the deepest declines in modern market history.

The S&P 500 bottomed in October 2002 and took until 2007 to return to its previous highs (about 5 years from the bottom and 7 years from its peak).

The Nasdaq took even longer to recover - it didn’t surpass its March 2000 peak (around 5,048 points) until April 2015, a 15-year recovery. This extraordinarily long rebound reflects the depth of the tech sector’s collapse and the fact that many dot-com companies went bankrupt.

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• Financial Crisis (2007–2009):

This bear market was triggered by the bursting of the real estate and credit bubble. In the years leading up to the crisis, housing prices soared, and banks issued high-risk subprime mortgages, assuming that home values would continue to rise indefinitely. However, in 2007, the economy began to slow down and mortgage borrowers started to default. This led to a banking crisis—major financial institutions in 2008 either collapsed or required bailouts due to massive losses on mortgage-backed securities. In September 2008, the fall of Lehman Brothers caused a global financial collapse, and stock markets reacted with panic-driven sell-offs.

S&P 500 fell by more than 50% (at its intraday low even by 57%), while the Nasdaq also lost more than half of its value. This decline was accompanied by a deep recession and ranks among the worst crises since the Great Depression.

The S&P 500 reached its bottom in March 2009 and only returned to its October 2007 level in 2013 — meaning the recovery took nearly 5 years. The Nasdaq also took several years to recover, surpassing its pre-crisis peak from 2007 (over 2,800 points) approximately three years later.

• Correction of 2010:

After the markets recovered from the financial crisis and began to rise sharply thanks to massive central bank stimulus, a natural correction occurred in 2010, amplified by the Eurozone debt crisis.

In the spring of 2010, problems in Greece and other Eurozone countries sparked fears of another financial market crisis. In May 2010, a technical incident known as the Flash Crash occurred, where algorithmic trading caused a sudden and dramatic price drop.

These combined factors led to a decline of approximately 16% in the S&P 500 by July 2010. Investors were worried about spreading financial instability and a possible return to recession.

• Decline of 2011:

In the summer of 2011, markets experienced a sharp downturn caused by a combination of domestic and international risks.

In the U.S., there was an intense debate over raising the debt ceiling, which resulted in a temporary downgrade of U.S. government debt by S&P from AAA to AA+, the first downgrade in history.

This unprecedented move shook confidence in U.S. finances. At the same time, the European debt crisis peaked, with fears of a domino effect among heavily indebted countries (Greece, Italy, Spain) and the potential breakup of the Eurozone.

These fundamentals once again triggered market panic — the S&P 500 fell approximately 21% intraday between May and October 2011, reaching the threshold of a bear market.

However, confidence soon returned thanks to coordinated central bank actions. Both the Fed and the ECB took steps to support market liquidity, and by the end of the year, markets stabilized.

• Chinese and Commodity Crisis (2015–2016):

Another significant decline occurred in late summer 2015, when China devalued its currency, and the Chinese stock market crashed following a previous bubble. Global investors grew fearful of China’s economic slowdown and its global impact.

The S&P 500 dropped more than 10% within a few days in August 2015. After a partial market recovery, a second wave of sell-offs hit in early 2016.

Oil and commodity prices plunged to multi-year lows, sparking fears of deflation and troubles in energy companies. European banks also faced doubts about their financial health. These pressures drove markets down again, with the S&P 500 losing 13% by February 2016.

Concerns over a hard landing for China’s economy and a collapse in commodity prices triggered a global risk-off sentiment.

These were two consecutive corrections.

The first one in summer 2015 lasted only a few weeks, after which the market partially recovered, but then a second wave of declines at the beginning of 2016 pushed the indices down again.

Overall, from the peak in May 2015 to the final bottom in February 2016, about 9 months passed.

The 2015 peak level was reached again in summer 2016, so the full recovery took approximately one year.

• Trade War and the Fed (2018):

The year 2018 brought two sharp declines, driven mainly by policy shifts and geopolitical tensions.

In February 2018, markets feared rapidly rising bond yields and inflationary signals, which sparked concerns that the Fed might raise interest rates more aggressively. This led to a brief 10% sell-off and the collapse of so-called short-VIX funds, which had profited from low volatility until then.

The market recovered, but in autumn 2018, the trade war between the U.S. and China escalated. And here we are again with Trump, who during his first presidential term introduced tariffs, while at the same time, the Fed continued raising interest rates and tightening its balance sheet through quantitative tightening.

The combination of fears over aggressive rate hikes and an economic slowdown triggered a massive sell-off in Q4 2018 — the Nasdaq fell into bear market territory, and the S&P 500 came very close (-19.8%).

By the end of the year, recession fears dominated the markets, but these quickly eased after the Fed signaled a more dovish approach in January 2019.

The correction in February 2018 (around 10%) was very short-lived — the decline lasted only 13 trading days, and by summer 2018, the indices were once again reaching new highs.

In contrast, the bearish reversal at the end of 2018 (October to December) lasted about three months.

Markets recovered during the first months of 2019, with the S&P 500 reaching a new all-time high in April 2019, just four months after the bottom.

The Nasdaq rebounded similarly quickly.

• Corona Crisis 2020:

The flash crash in February/March 2020 had a clear cause — the outbreak of the global COVID-19 pandemic. Within a few weeks, there was a massive sell-off of stocks worldwide.

The decline was amplified by panic and the unknown nature of the pandemic — volatility reached record levels, and on some days, indices fell by historically unprecedented amounts.

At the same time, however, there was an unprecedented response from governments and central banks (fiscal stimulus packages, interest rate cuts to zero, and massive quantitative easing), which helped to stop the market collapse.

This was a shock caused by an unexpected event, once again confirming the markets’ vulnerability to unforeseen black swan events.

This bear market was exceptionally fast.

The decline of over 30% occurred within just five weeks (February–March 2020), and by April 2020, a sharp rebound had already begun, fueled by unprecedented stimulus measures.

The S&P 500 erased all losses by August 2020, meaning it fully recovered in less than five months from its previous peak — the fastest recovery from a 20%+ drop in history.

The Nasdaq recovered even faster — thanks to the surge in tech stocks, it surpassed its previous February high as early as June 2020.

• Decline of 2022 (Inflation and Interest Rates):

Unlike the COVID shock, the 2022 downturn was more gradual and stemmed from macroeconomic factors. After 2020, interest rates remained extremely low, and economies were flooded with liquidity, which led to a surge in inflation in 2021 and 2022, further accelerated by disrupted supply chains and the war in Ukraine.

U.S. inflation soared to 40-year highs, prompting the Fed to aggressively raise interest rates in an effort to cool down the overheated economy. This sharp tightening of monetary policy triggered a sell-off in equity markets as investors reassessed valuations, especially for highly leveraged growth tech companies sensitive to higher rates.

Markets cooled in 2022 in response to the Fed’s series of rate hikes and growing recession fears. As Investopedia noted, 2022 was an example of how markets fall in response to Fed rate hikes aimed at taming surging inflation.

The Nasdaq suffered heavier losses (down about one-third) as growth stocks were hit by waning investor interest in riskier assets and rising financing costs.

The S&P 500 declined somewhat less, around 25%, reflecting broader diversification and the higher weight of more defensive sectors.

By the end of 2022, inflation showed signs of peaking, but markets remained volatile amid concerns over an economic slowdown.

From the above list of market declines since 2000, it is clear that downturns are typically multi-factorial. Valuations often play a key role — when markets are overvalued, even a small trigger can lead to a sell-off — and these are frequently combined with shocks or policy changes.

Recurring themes include the bursting of bubbles (dot-com, real estate), monetary tightening after periods of easy policy (e.g., 2018, 2022), and external shocks (9/11, pandemics, wars).

Whenever excessive optimism and risk accumulate - or an unexpected strongly negative event occurs - a correction follows to adjust these excesses.

Frequency of Corrections

As mentioned, 10% corrections are almost an annual norm in some form. They can even occur twice within a single year. The market simply cannot move upward endlessly—profit-taking and occasional reassessment of valuations are a natural part of the market cycle, often leading to price declines.

Approximately four times a year, markets also experience smaller corrections of around 5 to 7%.

A bear market with a correction of over 20% typically occurs every 7 to 10 years, but this is not a strict rule.

At the beginning of this article, I mentioned that major corrections are linked to economic cycles. Large bear markets are often associated with recessions or bursting market bubbles. The 2000–2002 and 2007–2009 bear markets were accompanied by official recessions and systemic crises.

In contrast, some shorter corrections (2011, 2015, 2018) were triggered merely by fears of a potential recession or other risks.

Still, it holds true that the biggest market declines typically coincide with serious economic problems, financial crises, pandemics, and similar shocks.

When the economy is healthy and corporate profits are growing, the market tends to quickly buy up minor sell-offs.

However, when a recession hits, the market can decline much deeper and for a longer period, as investors sharply downgrade their expectations for corporate earnings.

Comparison of Indexes

It is logical that the Nasdaq, as a tech-heavy index, is subject to larger fluctuations — experiencing bigger losses during crises, but also greater gains during economic expansions, compared to the broader S&P 500.

In the long run, however, both indexes have grown and surpassed their previous highs, confirming the historical trend that stock markets tend to rise over time despite periodic declines.

Recurring patterns - such as the alternation of euphoria and fear, or the connection to the economic cycle and central bank policies - have also been evident during this period and offer valuable lessons.

The key takeaways are that corrections and bear markets are a normal part of investing, they occur relatively regularly, and different market segments (e.g., technology vs. traditional sectors) may react differently.

For investors, it is crucial to keep the historical context in mind:

Despite occasional deep downturns, the market has always recovered and continued to grow, so discipline, diversification, and a long-term perspective have proven to be the best strategies to successfully navigate these cycles.

How to Act During Market Corrections

It highly depends on your investing or trading style.

Intraday traders may not care much about which direction the market is moving — they can profit in any market environment, as long as they are among the most skilled daily traders.

Long-term investors can simply close their eyes and wait for the storm to pass.

Of course, they may also choose to buy more of their favorite stocks during a correction.

However, it’s important not to be overexposed before a correction to companies that are unprofitable or heavily indebted, as these tend to suffer the most during market downturns.

Another crucial element is to have sufficient cash on hand, especially if you are trading on margin, to avoid coming under pressure from a potential margin call.

If you’ve succumbed to market euphoria and are overinvested, it is essential to close positions, take profits, reduce your portfolio, or hedge your positions - and to do so before you run out of cash and can no longer afford proper hedging.

It also depends on your risk sensitivity.

It is not a mistake, even during periods of excessive market euphoria and significant gains in your investment or trading account, to liquidate most or all positions and hold cash, waiting to reinvest once you feel the market has found a bottom and starts to rebound.

By doing so, your account won’t suffer losses during the correction, and the accumulated cash can be used to fuel future growth as soon as the market begins to recover.

Of course, this approach involves interrupting the holding period required for capital gains tax exemptions, so you need to carefully calculate both scenarios. It’s important to consider how stretched or overheated the market is, and evaluate the broader economic and geopolitical situation - which makes investing challenging, but also all the more interesting.

In case an unexpected black swan event occurs, the situation becomes much more difficult, especially if you are overinvested at that moment.

Therefore, always be prepared for any market scenario, and keep an appropriate amount of cash available, depending on the current state of the market.

It’s wise to hold more cash when markets are overstretched.

After a correction and during market recovery, you can afford to be more heavily invested again.

Successful portfolio management during corrections requires the right balance of cash levels and diversification.

The biggest mistakes investors make stem from overconfidence during market rallies and panic during sell-offs.

Those who keep a cool head, avoid greed, and prepare for corrections by managing potential risks, will emerge stronger from downturns and be better positioned for the next growth cycle.