The stock market hates uncertainty. Today, there is more uncertainty than can meet the eye. Unfortunately, I don’t think the question is whether or not a recession will occur. I think the question turns to how deep it will go – said another way, how big could the economic losses be?
First, let’s answer the most important question. Is this normal? Let’s take a look at what could be going on right now. These are the various phases of the stock market:
A Stock Market Crash – I start with this one because it doesn’t really fit on the scale below. A stock market crash is a quick, big, scary loss in the stock market that recovers quicker than a bull market. Think of the COVID-19 crash in 2020. In my opinion, that was a classic crash. You could say a crash is related to both the bear market and the correction.
The Bull Market – This is a good stock market. Everyone is making money. This is where the market is way more positive during the weekdays than negative. Then, sometimes, we run into a correction.
Correction – This is when the stock market loses over -10% but no more than -20%. It is a pause. The great thing about corrections is they create buying opportunities. However, they can get out of control because the risk is much bigger than anyone thinks. The correction will then suddenly morph into a bear market.
Bear Market – This is when the market loses more than -20% and goes down potentially as much as -45 to -55% in losses in total before it starts to recover. You end up losing not only real money but also time. Once the recovery takes us back up and over 20% in gains, you start looking for a new bull market, and the cycle starts again.
Every investor should be able to tolerate a –10% to -20% loss as long as they are temporary losses. That is a normal loss in a bull market. That is where I think we are today – a correction. However, there are a lot of scenarios that could quickly change this to a bear market. I will watch closely and report back if that opinion changes. I will be sending out alerts and info as I think it is necessary.
Bob Brooks is the host of the Prudent Money Radio Show, heard every weekday from 3:00 PM - 3:30 PM on FM Radio 91.3 KDKR
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