What’s the Difference Between a Market Correction and a Bear Market?
One key difference between a market correction and a bear market is the amount of decline stocks experience. These two trends also have different time frames, and tend to occur with different frequencies. A correction can refer to a decline in either a market index or an individual asset, while a bear market is used to refer to a broad market index.
Time Frame
Market corrections and bear markets aren’t defined by their time frames, but they do tend to have different time frames as a result of the amount of their declines. As you might expect, market corrections, with only 10% declines, usually have shorter durations than bear markets, which might last years. Each market correction and bear market can have a different time frame.
Frequency
Shorter market corrections also tend to occur more frequently than bear markets. You may see several market corrections within a bull market before the market takes a more substantial downturn into a longer-lasting bear market with steeper declines.
Time To Recover
Naturally, because of its more severe declines and longer duration, a bear market typically takes longer than a market correction to recover to its previous high.
Market Correction vs. Bear Market Example
All bear markets begin as market corrections. A market correction becomes a bear market usually when it lasts longer than two months and declines more than 20% from the most recent market high. Bear markets in recent years include the COVID-19 bear market that occurred in March 2020 and the bear market that occurred from 2007 to 2009 following the housing market crisis. Let’s review an example of trends using a hypothetical scenario from the S&P 500 index.
Market correction: If the S&P 500, a broad market index, was at 4,000 and it declined 100 points, the index would not be in a correction because the decline would only be 2.5%. However, if it continued to decline by another 300 points, it would be considered to be in a correction. That’s because the total decline would be 400 points from its peak of 4,000, or a 10% decline. Bear market: Using the same example above, if the S&P 500 index continued to decline another 400 points (for a total of 800 points) from its peak of 4,000, then the market would be considered a bear market because its declines would be 20% or more.
How Should You React to a Down Market?
Like with any stock-market trend, you can’t predict exactly when a correction or a bear market will occur. How you respond to a down market will depend on many factors, including your financial situation, time horizon, and investing goals. Some investors with higher risk tolerances who are investing for the long term, may want to hold on to their investments and wait out the market downturn. Other investors, such as retirees who want to preserve their capital, may want to have a strategy for selling during downturns, perhaps establishing a stock price at which they will sell. Other investors might prefer to prepare for market downturns by preparing to buy stocks at lower prices. That way, they can see more significant gains when stocks recover. Always be sure to consult a financial professional when making important decisions on how to invest during down markets.
The Bottom Line
The biggest difference between a market correction and a bear market is the percentage decline from the market peak. Market corrections generally occur more frequently than bear markets, and they typically are shorter in duration, although market corrections and bear markets can vary in duration, frequency, and severity.
