What a wild ride it has been in 2018. The stock market has been all over the place. If you look back in history, you will find today looking like the start of a few bear markets. Then you have financial experts that say this is only a correction. What is the difference? What is normal? When should you be concerned?
Writer and analyst Lance Roberts (www.realinvestmentadvice.com) is a great writer and offers a daily free email that is so good he should be charging for it. In this latest piece, he had this picture of bull and bear markets. I thought it was a good illustration.
By definition, a bear market occurs when the market declines more than 20% from the highest point. To add to that definition.... it not only declines -20%, it continues to fall over a longer period of time. The last bear market was 18 months with a lot of ups and down losing over -50%. Bear markets are just part of the investor's journey. Pop Culture Finance wants you to ignore them and pretend that they are not there. They are very real and very painful.
A correction is a decline of -10% to -20%. It is a normal part of a bull market (a market that goes up). Typically what happens is the stock market falls between -10% and -20% and then rebounds returning back to the bull market and goes up.
Investors should be able to withstand and stomach a correction. They are frequent and normal for a bull market. Anytime the market declines, the financial media always calls it a correction and never calls it a bear market.
So, the key question is always this - is it a correction or is it a bear market? There are many technical aspects of the market one could look at and draw a conclusion. To keep it simple - anytime the market declines -20%, doesn't recover and keeps falling? That is when one should be concerned. The good news is that the market gives warning signs ahead of time that we are in danger of a bear market. The last thing you want to do is follow Pop Culture Finance who refers to bear markets as "volatility" and acts like they don't matter or exist.
They matter greatly.
So, what do I think about today? There is not enough evidence one way or another. Having said that, the market looks weak and is following the same paths of bear markets before. It is definitely worth paying attention to.