A brief history of market corrections

What is a market correction?

We define a ‘correction’ as when a stock market falls between 10-20% in value from its most recent high point.

As long as there have been investment markets, there have been ups and downs. The price of a stock reflects an assessment of its future:

• How will revenues and profits grow?
• How will future returns to shareholders, like dividends and share buybacks, develop?
• What external factors could affect these?

The answers to these questions are interlinked with the prospects for the wider economy, for instance, economic growth or inflation. If investors think that revenues and profits will fall due to economic conditions, or that the market is too highly valued, they will sell stocks because they think they are worth less than now, and the overall market may fall.

 

How many market corrections have there been?

Since 1986, there have been 14 corrections of greater than 10% in the main US stock market, the S&P 500. In the UK’s FTSE 100, there have been more, 22 (shown as red points in the chart above).

Based on these figures, it is fair to expect a correction about every 2-3 years, making them far from remarkable and actually quite common. Some of these will include much deeper falls of over 20%, which we would consider to be a bear market.

As expected, given the number of causes and depth of stock market weakness, the time to fully recover back to previous highs is highly variable. However, on average, from a fall of 10% or more, it takes 336 days on average for the FTSE 100 to recover, but this can be as quick as 47 days or as long as six years in the case of the dot-com bust in 2001.

However, encouragingly, not including 2025, three quarters of the time the FTSE 100 is back to new highs within a year.

 

How often do corrections turn into bear markets?

From a fall of 10%, a full-throated ‘bear market’ is classified as a fall in equities greater than 20%. Fortunately, in the case of the FTSE 100 this occurrence is less than a third of the time.

In the US, it is more likely: bear markets occur 43% of the time following a 10% fall, including in 2025. These tend to stick in the mind – for instance Black Monday in 1987, the Great Financial Crisis in 2008/2009, or the COVID pandemic in 2020.

 

How does Arbuthnot Latham approach corrections?

Given that market corrections can have a multitude of causes, there is no single approach the Arbuthnot Latham Investment Management team takes. It is important to understand the main causes of the market weakness and whether then, based on our investment philosophy, it would be wise to shift our positioning.

If there are obvious signs that economic growth is deteriorating and corporate profits may shrink, it can make sense for us to lower our allocation to stocks and buy more defensive assets like government bonds or cash. However, if we believe the weakness is driven by more transitory, technical or political factors and the underlying economy remains sound, then the best outcome is likely to stay put, or even invest a little more into risky assets that offer good long-term prospects.

It is important not to react emotionally, to take a step back and consider the medium to longer term outcomes of our actions in portfolios. Holding cash for a significant period while markets rise misses opportunities for growth, and selling ‘at the low’ locks in a capital loss that cannot then be undone.

However, riding an obvious economic deterioration down without taking defensive action can make it more difficult for the assets to recover their original value.

 

Final word

Not all market corrections are malign. In fact, they can often be seen as healthy, filtering out excess market exuberance and bringing share prices more in line with fundamentals.

They happen commonly enough that a long-term investor would take them in their stride. Of course, as professionals we always take them seriously to ensure that we capture any opportunities that are presented while minimising any permanent loss of capital.

If you are a client and want to know more about what is happening in the markets, please get in touch with your investment manager. If you are not a client and want to find out how we aim to grow investments over time, get in touch.

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