A stock market correction can be simply defined as a stomach-churning decline that can make even the most seasoned investor lose sleep. A bear market shares these characteristics but is generally more severe, inflicting additional financial pain when your investment statements arrive alongside your bills.
Technically, a stock market correction occurs when a major index, such as the S&P 500* or the Dow Jones Industrial Index, drops 10 percent to 19.9 percent from its recent high. A bear market, on the other hand, is defined by a decline of 20 percent or more from the index’s peak. Bear markets officially end when the market surpasses the index's previous high-water marks.
Over the past three decades, the S&P 500 has experienced four bear markets, with an average decline of 41.3 percent. During this time, the longest bear market lasted 929 days, while the shortest, occurring during the early stages of COVID-19, lasted just 33 days. On average, the last four bear markets lasted 1.2 years.
What causes bear markets?
Various factors can trigger bear markets. Common culprits include high interest rates, rising inflation, and increasing unemployment. Global events, such as wars, pandemics, and crises stemming from country or institutional defaults, can also play a significant role. Additionally, indicators like weak corporate earnings or bleak future corporate projections can create a pessimistic atmosphere, leading to negative news and widespread anxiety. This can lead to panic-driven selling of equities and general discontent for investors.
It's important to remember that market movements are a normal part of the business cycle. Legendary investor investment Sir John Templeton once said: “There will always be bull markets followed by bear markets followed by bull markets." The key is to make smart decisions along the way.
*Market indexes listed are unmanaged and unavailable for direct investment. Investing involves risk, including the possible loss of principal. Past performance does not guarantee future results.