What Is a Stock Market Correction?

Posted February 8, 2018 6:51 p.m. EST

The sell-off in stocks has reached a new level in market lingo: a correction. After tumbling in recent weeks, the Standard & Poor’s 500-stock index closed Thursday in that territory.

Q: What is a stock market correction?

A: A correction is a 10 percent drop in stocks from their peak. Since Jan. 26, the S&P’s 500 has fallen 10.16 percent.

In some ways, 10 percent is arbitrary threshold. But it often signals that investors have turned more pessimistic about the markets.

Q: Does this mean stocks are headed down even further?

A: Not necessarily.

Over the past 20 years, there have been 10 corrections in the S&P 500, including the current one, according to Yardeni Research. The previous correction ended in February 2016.

Of those corrections, only two have turned into bear markets.

Q: Wait. What is a bear market?

A: It is a more severe and usually more sustained downturn in the market, when stocks drop by at least 20 percent.

The last one, during the financial crisis, lasted until March 2009. Then, the S&P 500 sank nearly 57 percent from peak to trough, according to Yardeni Research.

The previous bear market occurred during the dot-com bust. From the top of the market in March 2000 until the bottom in October 2002, the S& P 500 lost 49 percent.