What Defines a Bear Market?
Any time the stock market falls, pain is felt by investors. The severity of the fall determines how it is categorized and helps to provide a sense of how quickly a rebound may occur. The three categories are a pullback (a decline of 5%–10%), a correction (a drop of 10%–20%) and a bear market (a plunge of 20% or more).
This past October, the S&P 500 briefly fell by more than 20% from its 2011 highs, putting it in bear market territory. A quick reversal lessened the severity of the large-cap index’s fall, making the drop a severe market correction as of press time.
Share this article
When calculating performance numbers for our fund guides and our stock screens, we look at the performance of several indexes to determine if a new bear market (or bull market) period has started. Based on the data as of September 30, we concluded that stocks were not in a bear market. There were exceptions, as some markets and sectors had plunged by more than 20%, but such a big plunge was not evident across the majority of the indexes we reviewed.
Though calling a decline a correction instead of a bear market may sound like a naming convention, history shows a correlation between the magnitude of a fall and the length of time it takes for stocks to rebound. Historically, stocks have recovered at a more rapid pace from corrections than from bear markets. Therefore, not crossing the –20% line is a positive for stocks, both on the way down and on the way back up.
Keep in mind that stock prices are unpredictable. Furthermore, the markets never give a sign that a correction or a bear market has ended. Thus, for long-term investors, it makes sense to maintain an allocation to stocks, even during a bear market, as opposed to trying to time buys and sells.
To read more, please become an AAII member or CLICK HERE.