Pullbacks, Corrections, and Bear Markets
When the market drops, some investors lose perspective that downtrends and uptrends are part of the investing cycle. When stock prices break lower, it's a good time to review common terms that are used to describe the market's downward momentum.
A pullback represents the mildest form of a selloff in the markets. You might hear an investor or trader refer to a dip of 5-10% after a peak as a "pullback."1
The next degree in severity is a "correction." If a market or markets retreat 10% to 20% after a peak, you’re in correction territory. At this point, you’re likely on guard for the next tier.2
In a bear market, the decline is 20% or more since the last peak.2
All of this is normal.
Pullbacks, corrections, and bear markets are a part of the investing cycle. In fact, the chart below from JP Morgan shows the average market drop during a single year, since 1980, has been around 14%. Despite this, annual returns were positive in 32 out of the last 42 years (since 1980).
When stock prices are trending lower, most individuals second-guess their risk tolerance. But periods of market volatility can be the worst times to consider portfolio decisions.
Pullbacks and corrections are relatively common and represent something that any investor may see from time to time in their financial life, often several times over the course of a decade. Bear markets are much rarer. In fact, between April 1947 and September 2021, there have only been 14 bear markets.3
If you have experienced some investment anxiety due to the recent market volatility, it is likely time to have a check-up on your financial situation. Do you feel secure despite a pullback, correction or bear market? What is your plan for the next market downturn? If you could not confidently answer these questions, then contact us today!