Difference between a Correction and a Bear Market

Transcript

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