What You Need to Know About Stock Market Correction

The S&P 500 entered a correction zone yesterday at the close, dropping just over 10 percent from its January 26 high (while stocks are rallying today ).

As The New York Times notes, a correction does not always indicate death: there have been 10 corrections over the past 20 years, two of which foreshadowed bear markets – a steady decline of 20 percent or more – in 2000 and 2008. …

Trying to pinpoint the exact reasons for last week’s failures is foolish. But the most likely culprit appears to be fears that central banks will raise interest rates to stave off inflation and ensure fast-growing economies don’t overheat. Those fears intensified on Thursday when the Bank of England warned that it could raise interest rates faster than investors expected.

Here’s a good overview of what’s been going on since 2008 from Yardeni Research :

Yesterday’s drop may seem dramatic because it has been two years since the S&P hit a correction zone (as you can see in the chart above), and 2017 was such an unusually good year for gains. But the events of the week are not unexpected: experts have been warning of a bear market for some time now, as the current bull market is the second longest on record. According to Peter Oppenheimer , chief strategist for global investment at Goldman Sachs, it takes on average four months to recover from a correction and about two years to recover from a bear market decline.

As I wrote earlier, in such uncertain times, it is important to keep your long-term financial plan in mind. The decline last week may be just a hiccup compared to the gains of the past few years. However, if you are truly scared, this may be the right time to take stock (no pun intended) of your risk tolerance. No one would ever recommend selling when stocks are down, but as Ron Lieber writes in The New York Times , “You may have to work harder, or work longer, or do side jobs to achieve your goals. If that doesn’t bother you, then reduce your stock holdings accordingly. ” Just learn about the benefits you are potentially missing out on .

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