Fisher Investments Reviews Corrections and How to Navigate Them

Corrections, Pullbacks and Bear Markets

In our view, it’s crucial for investors to understand that not all market volatility is the same. The three commonly used terms to discuss periods of market negativity are pullbacks, corrections and bear markets. Pullbacks and corrections are short-term in nature and common during bull markets, whereas bear markets represent more severe downturns that typically last longer than a period of a few months.

Corrections are particularly dangerous for investors. They come on quickly and are often accompanied by seemingly plausible, scary stories that trick investors into thinking a correction will turn into a bear market. But there are some key differences between the two, as shown in Exhibit 1.

Corrections (gold line) are short-term declines of -10% to -20% from a market peak. Bear markets (green line) see declines of more than -20% over a longer period. Corrections also start abruptly and have a steep initial sell off. Conversely, bear markets usually start with a slow-rolling top and decline about 2% on average per month. In our view, this contrast is because corrections are generally sentiment-driven whereas bear markets are typically accompanied by a fundamental cause with the ability to knock trillions of dollars off the global economy—such as a global recession.

Exhibit 1: Comparing Corrections and Bear Markets

Source: Finaeon, as of 3/20/2025. Median S&P 500 Price Index correction and bear market returns, daily, 3/10/1937 – 3/18/2025.

Corrections: Difficult to Time

Though we understand the desire to want to protect against downside, corrections are extraordinarily difficult to time, and we are not aware of any investor with a verifiable record of doing so consistently. Therefore, we typically recommend long-term investors avoid the temptation to make material strategy changes during corrections.

To benefit, an investor would need near-perfect timing because the drops, and eventual recovery, often happen very quickly—sometimes in a matter of days or weeks. For example, during a large correction in Q4 2018, just nine trading days accounted for most of the market’s 20% drop—followed by markets surging +13.7% in the first 17 trading days after the correction bottom. Given these often short and unpredictable market moves, we believe there’s a high likelihood investors inadvertently miss the eventual recovery.

Another complicating factor in timing a correction: How to decide when to get back in? While selling stocks around the start of volatility may feel easy, re-investing during the throes of a correction can be much harder. The types of headlines and fears (Exhibit 2) that might spur an investor to sell at the start of a correction often become louder and scarier as the correction progresses. Knowing when it is “safe” to get back into the market is extremely difficult. For example, in the case of the correction below, an investor would have needed to be confident enough to reinvest amid collapsing oil prices, geopolitical developments and the longest government shutdown in US history.

Exhibit 2: Corrections: When is it Safe to Get Back in?

Source: FactSet, as of 1/8/2020. MSCI World Total Return Index, 3/30/2018 – 12/31/2019.

A Good Year Does Not Mean a Calm Year

Some investors believe volatility can indicate whether the stock market will have a good or bad year. However, there’s no reliably predictive pattern. As the following chart illustrates, most years include significant stock market declines at some point (gold bars), but this doesn’t automatically prevent those years from finishing in positive territory (green bars). Even if a correction strikes, it doesn’t preclude a strong year for stocks. Consider 2023—from August through October, multiple drawdowns drove the market into correction territory, with investors digesting multiple fears including a US government credit rating downgrade, reaccelerating inflation and the start of the Israel-Hamas war. Eventually, stocks rebounded and retraced the entire correction in a matter of weeks. Despite the correction along the way, stocks finished the year up more than 20%.

Exhibit 3: Volatility Isn’t Predictive

Source: FactSet, Finaeon, Inc., as of 1/22/2025. MSCI World Index price returns, yearly, 1998 – 2024.

Navigating Corrections

How an investor approaches negative market volatility can have a substantial impact on their long-term returns. Should you feel tempted to sell, consider the fears driving the market lower. Oftentimes, these fears are too small or too well-known to deliver a deep, prolonged shock to markets. Moreover, if you see a market decline exceeding the 2% a month average fresh off a recent market high, you might be experiencing a correction, not a bear. In which case, you’re likely best to stand pat. Remember, market volatility is normal, and over the long-term, markets have rewarded those who remained disciplined and invested.

Want to Dig Deeper?

In this article, we explored corrections and how investors should approach market volatility. For more thoughts on corrections and other negative market events—such as bear markets—you can watch Fisher Investments founder, Executive Chair and co-Chief Investment Officer Ken Fisher’s video, “Watch Out for This When the Market Drops”.

For further discussion on how to keep calm amidst market volatility, you can read Fisher Investments’ MarketMinder article, “Staying Coolheaded Amid Stocks’ Swings.”

For more market insights from Fisher Investments, read our latest articles.

Investing in securities involves a risk of loss. Past performance is never a guarantee of future returns. The results for individual portfolios and for different periods may vary depending on market conditions and the composition of the portfolio. Investing in foreign stock markets involves additional risks, such as the risk of currency fluctuations. The foregoing constitutes the general views of Fisher Investments and should not be regarded as personalized investment advice. Nothing herein is intended to be a recommendation. The opinions expressed are subject to change without notice.