Legal Definitions - market correction

A market correction occurs when a financial market, such as the stock market, experiences a significant but relatively short-term decline in value. This downturn is typically defined as a drop of 10% or more from its most recent high point. Market corrections are considered a normal and often healthy part of market cycles, frequently occurring after periods of rapid growth, and can be triggered by various factors such as economic concerns, shifts in investor sentiment, or unexpected global events.

• Example 1: Economic Uncertainty

  After a prolonged period of economic expansion and rising corporate profits, a country's central bank announces that it will likely raise interest rates more aggressively than anticipated to curb inflation. This news prompts investors to worry about higher borrowing costs for companies and a potential slowdown in economic growth. In response, the national stock market index, which had been steadily climbing, drops by 12% over the course of three weeks. This 12% decline from its recent peak, driven by a shift in economic outlook, is an example of a market correction.

• Example 2: Sector-Specific Overvaluation

  For several years, the shares of companies in the artificial intelligence (AI) sector have seen explosive growth, with many startups achieving extremely high valuations despite not yet generating substantial revenue. Financial analysts begin to issue reports suggesting that these valuations are unsustainable and that the sector is in a "bubble." Following a prominent investment bank's downgrade of several key AI stocks, investors start to sell off their holdings in these companies. The specialized index tracking the AI sector falls by 15% in a month. This significant downturn within a specific industry, caused by concerns over inflated asset prices, represents a market correction for that sector.

• Example 3: Geopolitical Event

  Tensions suddenly escalate between two major global powers, leading to fears of trade disruptions, increased tariffs, and potential instability in international relations. This unexpected geopolitical event creates widespread uncertainty among investors. Global stock markets react sharply, with the main international market index, which had recently reached an all-time high, dropping by 11% in a single week as investors move their money into safer assets. This swift and substantial decline, triggered by a sudden geopolitical development, is a clear instance of a market correction.