Share market corrections – what does history tell us?
Share market corrections are frequent, typically shallow, and historically short-lived. For long-term investors, the evidence strongly supports staying invested and using drawdowns opportunistically.
- How large are typical corrections?
Across developed markets, including the US and Australia (which is highly correlated to global cycles):
- A correction is defined as a 10–20% decline
- The average drawdown is ~13–14%
- Most corrections cluster in the 10–15% range, rather than approaching bear market territory
Frequency:
- Evidence suggests a 10%+ decline roughly every ~3 years globally
- Time to bottom (drawdown phase)
Typical correction dynamics:
- Peak → trough: ~3–5 months on average
- Can be faster (weeks) if driven by sentiment or shocks
- Slower if tied to earnings deterioration or tightening liquidity
- Time to recovery (back to prior peak)
This is the most relevant metric for investors.
US market evidence (proxy for global equities):
- Average recovery (10–20% correction): ~4–8 months
- Median recovery often 3–6 months
- Full cycle (peak → trough → recovery): typically 6–12 months
If recession occurs:
- Drawdowns deepen toward ~20%+
- Recovery extends to 1–2 years or longer
- What history tells us about investor behaviour
- Corrections are common but rarely escalate:
- Only ~45% of 10% declines become bear markets (>20%)
- The best returns often occur shortly after corrections
- Missing early recovery phases materially reduces long-term returns
- Strategy implications
Positioning framework
During a 10–15% correction:
- Maintain core equity exposure
- Add incrementally (staggered buying)
- Focus on quality and earnings resilience
If correction deepens (>20%):
- Shift to more defensive positioning initially
- Prepare for longer recovery window (1–3 years)
- Conclusion
- Average correction size: ~13–14%
- Time to bottom: ~3–5 months
- Time to recover: ~4–8 months
- Total cycle: typically under 1 year (non-recessionary)
For disciplined investors, they represent entry points—not exit signals.
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