We keep hearing about the words market correction and bear market being used on the stock market news a lot. If you are investing, you should know and understand these financial terms and their differences and not be surprised by them when they actually happen. As you will see below, these events do occur rather frequently.
The more you realize that they are common the better you can be prepared for how you manage your investment and retirement plans. The worst thing in investment can happen due to bad investing decisions out of either fear or greed. And lack of knowledge is usually the main cause of fear.
What is a market correction?
Market correction is defined as drop of 10% from the market peak. On average, corrections last 4 to 5 months and occur as often as every year (8 to 12 months). The market has had 22 corrections since 1945, 10 of the corrections within the last 20 years. The previous correction had ended in December 2018. The stock market loses, on average, 14% in a correction.
What is a bear market?
Bear markets is markets in which the stock or index has fallen more than 20%. On average, bear markets lasted 14 months and took 24 months to recover. There have been 12 bear markets since 1945 / WWII with average decline of more than 30%. The biggest decline was bear market of 2007-2009, which went into a great recession with stock market suffered slightly more than 50% drop.
What is a recession?
A recession is a period of negative economic growth that happened 2 consecutive quarters in a row that last more than 6 months. It goes beyond the financial markets as to effect the economy as a whole visible in GDP, unemployment, industrial production and sales. On average, recessions since WWII have lasted a duration of 10 months.
Market Crash & Bear Markets In The United States Since 2000
- Dot-com bubble (Mar 10th, 2000): Collapse of technology bubble.
- 911 attacks (Sep 11th, 2001): September 11 attacks caused the global stock market to drop sharply.
- Stock market downturn of 2002 (From Mar 2002 with dramatic decline in July and September):
- Bear market of 2007-2009 (Oct 2007 – Mar 2009): DJIA, Nasdaq and S&P 500 all suffered declines of over 50%.
- Financial crisis 0f 2008 (Sep 16th, 2008): Largely due to subprime loans (provisions of loans to people who may have difficulty maintaining repayment schedules.
- Bear market of 2011 (Between May 2nd and Oct 4th, 2011): S&P 500 entered a bear market with a decline of 21.58%.
- Market sell-off 2015 (From Jun 3rd, 2015 until August 2015): Dow Jones fell 1,300 points in 2 days. The plunge wiped out a total of $10 Trillions on global markets.
- Stock market downturn of 2018 (Sep 20th, 2018): S&P 500 dropped 19.73% while DJIA fell 18.78%.
- Coronavirus stock market crash 2020 (Feb 24th, 2020): Dow dropped more than 3,700 points or over 10% in less than a week. Largest one-day point drop in history with Dow fell over 1,190 points in a single day. Partly due to market correction.
Further Reads: List of stock market crashes and bear markets
Recessions In The United States Since 2000
- Early 2000 recessions (Mar to Nov 2001): The dot-com bubble, 911 attacks brought decade of growth to an end.
- Great recession (Dec 2007 to Jun 2009): Subprime mortgage led to housing bubble burst. Collapse of several large financial institutions and the automobile industry.
Further Reads: List of recessions in the United States
Based on the information above, several findings can be drawn:
- Short term volatility – Markets crash often, every 2-5 years. When it’s bear market, the drop is at least 20% up to 50%. In all cases, the market has always recovered.
- Recession’s a cycle – We haven’t had a recession in the last decade. The most recent recession was before 2010. Recessions have occurred once every 10 years in the history. That’s why some economists think a market correction (defined as a 10% drop from the market top) was due.
- Bear flattens growth – The stock market usually ended the year flat in the year of bear markets.
Don’t let the news drive you into a panic mode. As an investor, I am guessing you are probably somewhat optimistic by nature. View the market as an opportunity, but don’t be greedy. Remember that you invest for the long term not just for this season. The market always turn around.
What are your main takeaways from this information? Do you worry about your investment whenever market crashes?