Personal Wealth Management / Expert Commentary
Difference between a Correction and a Bear Market
Is it a correction or a bear market? What’s the difference, and why does it matter?
While there are technical distinctions about the magnitude of market decline that defines each, most importantly: One tends to be short, sharp and caused purely by sentiment, while the other is caused by fundamental negatives and followed much more frequently by an economic downturn. Ken also explains why a long-term focus is so important for most investors.
What's the difference between
a correction in the stock market and a bear market?
Well, there's a lot of squishy in there.
Technically, normally, people define a correction
as a decline of 10% to 20% in the broad market,
not a subcategory of the market.
A bear market is typically defined as something that's
more than 20% down from the peak.
I just want you to think about that for a second.
Because is there really a difference that is important
between down 19 and down 21? Of course not.
That's all little stuff. That's little noise along the way.
A big bear market down 35%, 40%, 45%,
is pretty much always accompanied by a global recession.
If you think about the world that you're normally in,
could you go from 21 to down 23 and still have that be a correction? Sure.
Those corrections tend to be fairly short, fairly sharp, over in a matter of months,
not a couple of years.
And then they tend to bounce back about as fast as they came.
Now, the reality is
that a bear market bounces back about as fast as it came, too.
Both of them tend to have a V-like pattern.
The difference is that the duration in a correction
is much, much shorter in time than the duration in a bear market,
which is much longer in time with a deeper bottom.
So, you have a pure sentiment phenomenon in a correction,
where the economy really isn't going bad, but people are getting afraid of things
that are really sort of fear of ghosts
as opposed to fear of real things that get bad and worse.
There's a judgment call, which you always have to make,
are things really going to hell in a handbasket?
Or are people just freaking out and being afraid of stuff
that they are extrapolating
but doesn't actually turn out to be so bad.
I think that's what the case is in this case.
But the fact is, there isn't a bright line in the sand.
If the market's down 18%--
which, of course, it takes a while to get from here to there--
but if the market's down 18%, that's technically called a correction.
If the market's down 22%, that's technically called a bear market.
But that's not really important. What's really important
is to keep your eye on the longer-term picture
of where's the economy going and where's the market going
in the longer term, and for that, I think, you're thinking about,
is there a recession or isn't there ahead?
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