Personal Wealth Management / Market Volatility
Fisher Investments' Founder Identifies the Difference Between a Correction and a Bear Market
Fisher Investments’ founder, Executive Chairman and Co-Chief Investment Officer Ken Fisher discusses the differences between a short-term correction and a longer, conventional bear market. Recognizing the characteristics of each can help you navigate markets more successfully.
A correction is a sharp market drop of 10-20%, typically fueled by scary-sounding news headlines. In a correction, Ken says, markets typically bounce back as quickly as they declined when reality proves better than feared. A bear market, however, is a sustained market decline exceeding 20% with a rolling start (compared to a correction’s nosedive). Ken says the best thing investors can do during corrections is to exercise patience and discipline. No one can consistently time corrections and timing one wrong can have a dramatically negative effect on a portfolio.
Title screen appears, “Fisher Investments' Founder Identifies the Difference Between a Correction and a Bear Market”
A man appears on the screen wearing a navy suit, sitting in a office in front of a fireplace.
He begins to speak.
A banner identifies him as Ken Fisher, Executive Chairman and Co-Chief Investment Officer, Fisher Investments.
Ken Fisher doing hand gestures time to time explaining.
Ken Fisher: You get a little wiggle on the downside in the stock market and there is a tremendous myopic tendency for so many people to say is this the start of a bear market? And in reality, it could be, or it could be the beginning of a correction.
On the screen, the following title appears “Corrections vs. Bear Markets” underneath it the subtitles “Correction” and ”Bear Market” this 2 are to explain the 2 points mentioned.
Ken Fisher: But the two are fundamentally very different. And they're different in these ways.
The screen changes to a chart showing corrections and when is it safe to get back in over a 6-month period.
Ken Fisher: When you have a correction, there's always one or more really scary stories that come to tend to dominate attention. And those one or two, are parallel to a stock market that goes down steep and fast. Not as big as what happened in February, March of 2020, but fast. One, two, three months to go down as much as 20% in global stocks, broad market global stocks, something that drops ten to 20. The nature of it is it's fast, it's sharp, and it's largely one way. It also, oh, by the way, tends to correct in a V shaped pattern that bounces back just about exactly as fast as it went down. Bear markets, by conventional standards take along time, a year to two. They're down more than 20%, but they start off gently. One of my rules that is just basic I've done this right, I've done this wrong, but the rules always worked, is the first three months of a real bear market.
On the screen a new chart appears, the chart is showing the three-month rule of a Bear Market, then the chart shows a tool that indicates a two-percent rule.
Ken Fisher: A conventional bear market, tend to be relatively gentle and the totality of the bear market from its absolute peak to its absolute bottom tends to average two to 3% per month. Vacillates around it, of course, but averages from top to bottom about two to 3% per month.
On the screen a chart appears, this chart is showing the two-thirds / one-third rule index reading strategy.
Ken Fisher: The back two thirds in magnitude of the drop, not this, but this. The back two thirds of the drop in magnitude tends to only be the last one third approximately of time. And the first two thirds of time, from the top to the bottom, that first two thirds of time tends to only be about one third of the drop. And in that early gentle phase, after the bull markets rolled over and started to go down, what you hear people say all the time is I didn't get in enough before. This is my opportunity to get in. And this is, in a sense, the great humiliator of the stock market. Horn swaggling, the last greater fool to get into stock before you get to that last two thirds that go euuuuh.
On the screen a new chart appears, the chart shows two indexes one green and one red, the green index is a quick V shaped move that is no less than a -10% drop but the red one is a long, big V shaped under-30% drop.
This chart explains corrections vs. Bear Markets.
Ken Fisher: The point that I'm wanting you to see, said simply, is corrections tend to be short and sharp, come out of nowhere and end about as fast as they came, reversing in a near V shaped pattern. The conventional real bear market tends to be slow and gentle starting. I've always said there's not much lost in the first three months. So, I never would turn bearish. And I have turned bearish successfully sometimes in my life and I've missed it sometimes. But I would never turn bearish until I'd seen higher prices three months earlier because it's always easier to tell what's happened after you have more evidence and to actually see a bear market peak after it's occurred than before the history of the stock market. It's like a cemetery with graves littered of people who've tried to foretell a bear market beginning and a bull market peak before it happened.
Ken Fisher: The fact is, no one can call corrections successfully on any consistent basis. No one ever has. No one's ever gotten rich calling corrections. It's not even worth trying to sidestep them because they're so short and sharp and come out of nowhere in reverse so fast. They happen for any reason or no reason at any point in time. And you can have a couple in a year, or you can go years and years without having one. They on average have been about one a year, but there's no way to know in the next year or two if there'd be any, or there could be a couple in a year.
On the screen a V shaped index is drawn to explain Timing a Bear Market.
Ken Fisher: But bear markets are worth, if you can, trying to sidestep a piece out of them because they're bigger. It's a fundamentally different thing. And they act different. And understanding the difference in how they act is important in understanding what you should do relative to whether you should take action or try to take action or even think about taking action or not. You think about it if you think it's really a bear market that's already underway, and you've waited the three months after, and you can see big fundamental negatives that aren't already widely prepriced. If it's just that short, sharp thing, that's a correction, you just ride it out because it doesn't take very long to get past it.
Ken Fisher: And if you try to play a correction, as so many have so often, you tend to get whipsawed, you tend to get out too low and get back in at higher prices and have lost for the activity. Thank you very much for listening to me.
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A series of disclosures appears on screen: “Investing is Securities involves a risk of loss. Past performance is never a guarantee of future returns. Investing in foreign stock markets involves additional risks, such as the risk of currency fluctuations. The foregoing constitutes the general views of Fisher Investments and should not be regarded as personalized investment advice or a reflection of the performance of fisher investment or its clients. Nothing herein is intended to be a recommendation or a forecast of market conditions. Rather it is intended to illustrate a point. Current and future markets may differ significantly from those illustrated here. Not all past forecasts were, nor future forecasts may be, as accurate as those predicted herein.
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