- What is a market correction?
- Bear market vs. market correction
- Stock market crash vs. market correction
- How often do market corrections occur?
- Are we currently in a market correction?
- The Canadian Market
- The U.S. Market
- Will there be another market correction?
- How to prepare for a stock market correction
- 1. Diversify your portfolio
- 2. Invest in low-volatility market sectors
- 3. Focus on the long term
Recent market volatility has left many investors feeling uncertain and apprehensive about the future. As of this year, a significant number of pandemic-era growth stocks have experienced substantial declines, with the tech industry and the renowned FAANG (Facebook, Amazon, Apple, Netflix, and Google) stock cohort being hit particularly hard. Major stock market indexes are currently trading below their all-time highs, raising concerns among investors about the possibility of further market downturns.
The fear of a potential market correction, or in a worst-case scenario, a complete market crash leading to a prolonged bear market, is palpable among market participants who are preparing for all outcomes.
What is a market correction?
A market correction refers to a rapid, sudden decline in the value of a stock market index, such as the S&P 500, Nasdaq Composite, or S&P/TSX 60. This decline is commonly defined by a drop of 10% or more from the most recent peak of a major index, distinguishing it from regular market fluctuations.
In contrast, declines of greater magnitude can classify as a stock market crash, which often involves more dire economic repercussions and investor panic.
Market corrections can vary in duration, sometimes lasting just days, but they can also extend over weeks or even several months. Despite their unpredictability, corrections are generally short-lived compared to true bear markets, which are characterized by extended periods of significant declines and economic malaise. During a correction, the market adjusts from short-term anomalies or overvalued conditions, paving the way for a healthier, more sustainable growth trajectory.
Bear market vs. market correction
A bear market occurs when a stock index experiences a period of prolonged price decline, generally measured in months or even years.
Compared to a market correction, a bear market generally involves a decline of 20% or more from recent highs. Bear markets are usually accompanied by less than favourable economic conditions, such as high inflation or recessions.
Conditions during bear markets tend to be highly volatile, with numerous short-lived rallies (bull traps) occurring amid a steady decline.
Stock market crash vs. market correction
Compared to market corrections, true stock market crashes are usually more dramatic, sudden, and sharp. They’re often caused by a flurry of panic selling that causes significant declines in prices during intra-day trading or over a period of several days.
In response to market crashes, numerous exchanges have trading halts, also known as “circuit breakers,” that either pause or suspend trading if a major index crashes. For example, the S&P 500 imposes circuit breakers at 7%, 13%, and 20% intra-day declines.
| Feature | Market Correction | Bear Market | Stock Market Crash |
|---|---|---|---|
| Definition | Short-term price decline | Prolonged period of declining prices | Sudden, sharp, and severe market drop |
| Magnitude of Decline | Typically 10% to 20% from recent highs | Typically 20% or more from recent highs | Can exceed 20% in days or hours |
| Duration | Usually weeks to a few months | Often lasts months to years | Typically lasts a few days or less |
| Cause | Market normalization or investor caution | Economic downturns, high inflation, recessions | Panic selling, geopolitical shocks, major economic events |
| Volatility | Moderate | High volatility with frequent bull traps | Extremely high volatility |
| Investor Sentiment | Cautious but not panicked | Bearish, with sustained negative outlook | Fear and panic dominate |
| Economic Conditions | Often stable or slightly uncertain | Often weak or deteriorating | Often coincide with crises or major disruptions |
How often do market corrections occur?
On average, a market correction occurs about once every two years, but can vary depending on the index. A highly volatile index like the Nasdaq 100 is more likely to experience a correction than a stable blue-chip one like the Dow Jones Industrial Average. Market corrections also become more likely following prolonged bull runs when valuations are running high.
Prior to 2022, the most recent market correction (which eventually became a crash) came during March 2020 at the start of the COVID-19 pandemic. This did not manifest into a bear market due to the intervention of the U.S. Federal Reserve, which dropped interest rates and introduced quantitative easing to stimulate the market.
Are we currently in a market correction?
It depends on which market you’re referring to. While some indexes have entered correction territory, others are approaching or already in bear market conditions due to ongoing economic pressures and rising geopolitical tensions, particularly the trade dispute between Canada and the United States.
The Canadian Market
As of April 2025, the Canadian market is experiencing a correction, and the situation continues to deteriorate. The S&P/TSX Composite Index has dropped approximately 11.4% year-to-date, falling to a seven-month low, and TSX futures recently hit an eight-month low amid escalating trade tensions with the U.S. The energy and financial sectors—typically strongholds of the Canadian index—have both posted notable declines, weakening the index’s traditional resilience.
This downturn is primarily driven by investor concerns over a widening trade war, with U.S. tariffs triggering fears of retaliatory measures and slower cross-border economic activity. While the Canadian market has not yet crossed the 20% threshold to be classified as a bear market, continued pressure could push it over that line if current conditions persist.
The U.S. Market
The U.S. market remains under sustained bear market conditions. After recovering modestly through late 2023 and early 2024, the resurgence of inflationary pressures and renewed global trade frictions have caused the S&P 500, NASDAQ, and Dow Jones Industrial Average to give back much of their gains.
- The S&P 500 is down approximately 18% year-to-date.
- The NASDAQ Composite has fallen more than 21%, meeting the technical criteria for a bear market.
- The Dow Jones is also slipping, currently down around 15%.
This downturn is being driven by fears of economic slowdown, continued rate pressures from the U.S. Federal Reserve, and decreased corporate earnings outlooks.
Will there be another market correction?
Yes—market corrections are inevitable. The question is not if, but when. Predicting the exact timing is impossible, even for the most sophisticated financial institutions and analysts. Several key variables will influence the likelihood and severity of future corrections:
- Trade Policy Volatility: The intensifying trade conflict between Canada and the U.S. is already causing ripple effects across global supply chains and equity valuations.
- Inflation Trends: Ongoing inflation in both countries, especially if CPI numbers continue to exceed expectations, could force central banks to maintain or raise interest rates further.
- Monetary Policy: The actions of the Bank of Canada and the U.S. Federal Reserve—particularly regarding future rate hikes—will significantly influence investor behavior.
- Macroeconomic Indicators: GDP growth, employment data, and consumer spending figures will play a central role in determining market sentiment in the coming months.
Generally, when assets become over-valued in a low-interest rate bull market, there is a chance for them to revert to the mean (return to average values) in the future when the macroeconomic scenario is no longer as attractive. Investors should expect continued volatility and remain focused on long-term fundamentals and diversification.
How to prepare for a stock market correction
Good investors always adjust their risk exposures based on their investment objectives and time horizons. Keeping losses minimal is just as important as maximizing gains when it comes to overall portfolio value.
Preparing ahead of time for a possible correction can help you keep holdings in the green and drawdowns low. Here are a few ways to prepare for a stock market correction.
1. Diversify your portfolio
The simplest way to reduce the effects of a potential market correction is by reducing your equity exposure. This means sizing the allocation of stocks in your portfolio to a level that satisfies your risk tolerance.
Having 100% in stocks can be risky for many investors. Some choose to lower this to 90%, 80%, or 60%, and allocate the remainder to investment-grade bonds, mutual funds, ETFs, gold, real estate, or cash. Keeping an allocation to assets other than stocks can give you dry power to rebalance into pummeled equity positions at a lower-cost basis following a correction.
2. Invest in low-volatility market sectors
Investors can also reduce their sensitivity to a market correction by investing in more defensive market sectors like health care, consumer staples, and utilities. On the other hand, small- and micro-cap stocks, stocks with a high beta, and growth stocks are riskier investments. During bull markets, these stocks tend to outperform, but can suffer greatly during a correction.
3. Focus on the long term
Sometimes, the best way to prepare for a market correction is to simply do nothing and stay the course. If you own a well-diversified portfolio of high-quality stocks and bonds, sticking to your investment strategy and ignoring the market volatility is a prudent move. This involves ignoring the urge to panic-sell, consistently making contributions, and re-balancing investments annually as needed. In the short-term, the stock market can be unpredictable, but over the long term, it trends upwards.