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September 04, 2015 at 08:52 AM
Is the sell-off in U.S. stocks that began at the end of July a new bear market or simply a correction? It’s a question financial advisors, market analysts and retail investors are wondering.
The classic definition of a bear market is a drop that is 20% from its peak or greater. On the other hand, a stock market correction is a drop of at least 10% but less than 20%.
Although the Dow Jones industrial average, Nasdaq 100 and S&P 500 did fall more than 10% from their yearly highs at end of July through the Aug. 24 market close, all three indexes were in correction mode as opposed to bear market territory. Historically, most stock market corrections have averaged a decline of 15% and are much shorter in duration compared with full-blown bear markets.
(Through Sept. 3, the Nasdaq-100 had declined 0.08%, the S&P 500 had a drop-off of -5.31%, and the Dow had weakened by 8.24% so far in 2015.)
During the last two bear markets from 2000-’02 and 2007-’09, U.S. stocks lost more than 50% in value. While those market losses were dramatic compared to other historical bear markets, both bear markets were relatively short-lived declines.
In some cases, bear markets can have extremely short life spans. For example, the bear markets in 1987, 1990, and 1998 lasted only three months.
Markets Are Secular
The longer-term performance of stocks is sometimes referred to as a secular market trend. The word “secular” comes from the Latin word saeculum which means a “long period of time.”
A secular market trend generally lasts 5 to 25 years and is made up of multiple primary trends. For example, a secular bear market consists of smaller bull markets accompanied with larger bear markets. The stock market rally from 1932 to 1937 qualifies as a bull market rally within a secular bear market because at its top in 1937, stocks were still almost 30% below their all-time highs in 1929.
In contrast, a secular bull market will have much larger bull markets surrounded by smaller bear markets. A recent example of this is the 19% decline experienced by the S&P 500 from May to October 2011. Not only did this particular decline occur during a bull uptrend, but it turned out to be a much smaller in scale compared to gains in stocks.
