Correction

A market pullback of 10–20% from a recent high — more significant than routine noise but not severe enough to qualify as a bear market.

Corrections are the middle tier of market declines: more meaningful than normal day-to-day volatility but not (yet) bear market territory. Technically a correction begins at −10% from the peak and continues until the market either recovers its high or falls another 10% into bear market territory.

Corrections are a routine feature of healthy bull markets. The S&P 500 experiences a correction roughly once every 1–2 years on average. They serve a useful function: resetting stretched valuations, flushing out weak holders, and creating buying opportunities for long-term investors. Most are triggered by specific catalysts — a geopolitical shock, an unexpected Fed statement, a deteriorating earnings outlook — that shake confidence temporarily without altering the underlying trend.

One reason corrections are psychologically difficult is that it's impossible to know in real time whether a −10% decline will snap back quickly or continue into a full bear market. Investors who sell to "wait for the bottom" frequently miss the recovery. Research consistently shows that most corrections recover within weeks to months, and that staying invested produces far better long-term outcomes than tactical allocation changes.

This definition is for informational and educational purposes only. Nothing on Finance Compass constitutes financial, investment, or trading advice. Always conduct your own research and consult a qualified professional before making financial decisions.