What Are Bear Markets?

With stock prices down sharply last week the words “bear market” and “correction” have once again been bandied about.  In response, I first offer the standard definition of both terms and then a warning.  A “correction” is defined as a drop of 10% or more in major indexes like the S&P 500 from previous highs.  It is called a “bear market” if the drop is more than 20%.

Q3 hedge fund letters, conference, scoops etc

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As properly defined, both corrections and bear markets are ex post concepts – they say nothing about the future.  Too frequently both terms get misinterpreted.  People say we are “in a bear market” as if that means that prices are more likely to fall than rise in the near future.  In fact, there is no such predictive content.  To the extent that past recent drops in prices predict anything, it is that future prices are slightly more likely to rise.  However, the effect is so small as to be of no practical importance.  The warning is that if you hear people talking about bear markets, listen carefully.  They may not know what they are talking about.

Article by Brad Cornell’s Economics Blog


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