Good Question: What Is A 'Market Correction'?
MINNEAPOLIS (WCCO) -- After another day of huge sell-offs on Wall Street, the Dow Jones is down 13 percent and the S&P 500 is down 11 percent from their highs back in May. That means it's an official market correction.
So, what is a market correction? How often does it happen? Good Questions.
"A market correction is part of the market cycle," Chuck Hannema, a professor of capital markets at Bethel University, said. "We want to be sure we don't overreact when we have a correction and capitulate into something that is fear-based as opposed to fact-based."
A market correction is officially defined as a 10 percent reduction in value over a relatively short period of time. Often, it is measured from its most recent high. This is different from a bear market, which is measured over a longer period of time and has a 20 percent drop in value.
According to a report by Deutsche Bank, the market corrects itself, on average, every 357 days. That's about once a year. But, the last correction was in October 2011, making this current bull market the third-longest in history.
While several experts are pointing to the Chinese economy, a potential rise in U.S. interest rates and overvaluation of U.S. stocks as reasons for this current correction, Hannema points out no one can predict the timing of a correction or a bear market.
"History has proven we cannot time the market," Hannema said. "We cannot time the bottom, we cannot time the top, so patience is one of the keys of sticking it out."
In general, corrections last two-and-a-half months. Hannema says there can be some positives to them.
"For buyers, this is a time when stocks are on sale," he said. "A correction is a time for us to get into a marketpoint where prices are on sale and that's when we want to buy. You don't want to sell in this market, you want to buy in this market."
