On the radio, we have been talking about the Coronavirus and the stock market from every angle. The biggest question in the minds of investors should be this:
Are we in a bear market or a correction?
Let's review the difference between the two. First, a correction is, on average, pretty much an annual thing. It occurs when a stock market drops more than 10% and less than 20%. It is a regular event. When the market falls into a correction, it declines between -10% and -19% maximum loss and then rebounds and returns to a bull market. If your strategy is to buy and hold, you should be able to stomach a correction. A bear market is a different animal (sorry couldn't resist the pun). The decline is over 20%. The average decline in a bear market is -41%. During the financial crisis, the S&P 500 declined a total of 55%. They last an average of 367 days. If corrections are a bump in the road, Bear Markets are roads full of sinkholes.
Pop Culture finance will not say the words Bear Market or loss. Instead, everything is a correction, and failure is nothing more than volatility. Both of those words tend to sound less alarming.
A Bear Market starts when we fall -20% from the highest point of the stock market. We will use the Dow Jones Industrial Average as the stock market. The high on the Dow was 29,551, in February. A -20% decline occurs if and when the market reaches 23,640. You can monitor this for yourself. How the stock market reacts to that stock market number will tell us a lot. You know the chances are high that we are in a bear market if the stock market cannot recover and climb back above 23,640. Bear Markets have a difficult time recovering once the losses are beyond -20% and continue to keep declining. Think of that -20% number as the line in the sand. Below that number is bad, above that number is good.
There are a host of indicators that you can follow as well. The -20% mark is important and an easier one to track and understand. Why is that important? That higher than -20% loss is an indication that the market might be in trouble, and you might want to go to Plan B and do something about the risk that you are taking. Bear Markets can be brutal. All you have to do is think back to the Financial Crisis.
On Monday, we were close with the Dow finishing off the day at 23,851, with the market coming within 211 points of a -20% loss. As I always say, know your risk level and be at peace with it.