Why the Sell-Off Is a Correction, Not a Bear Market

Investors have gotten spoiled in recent years. From its bear market low in midday trading on March 6, 2009, the S&P 500 Index (SPX) rose an impressive 331% to its record close on January 26, 2018. This upward march has proceeded with setbacks that have been remarkably short and shallow, by historic standards. A correction in which stock prices temporarily retreat by 10% or more is both long overdue in the present bull market and a common, recurring event in the typical bull market.

By contrast, the standard definition of a bear market includes a price decline of at least 20%, often over a protracted period of time. Meanwhile, the current bull market is only the most recent example in which corrections have been followed by gains to new heights. On February 6 the markets showed their resilience by staging a recovery from recent losses, with the S&P 500 gaining 1.74% on the day, and the Dow Jones Industrial Average (DJIA) posting a 2.33% rally. Nonetheless, it is too early to say whether this represents a lasting turnaround, or a pause in a correction that has yet to run its course.

Fundamentals Point Up

Bear markets frequently are triggered by economic downturns, and often with a time lag of many months. However, worldwide GDP growth remains strong, and there are no indications of an impending recession. Moreover, corporate earnings growth is strong, and equity valuations appear to be stabilizing. Also, while interest rates are on the rise, and inflationary pressures are growing, both nonetheless remain low by historic standards. (For more, see also: Why Stocks Won't Crash Like 1987: Goldman.)

'Welcome, Healthy Correction'

For all the anguish that inexperienced or impatient investors may feel during a correction, these events often are salutary events that bring stretched valuations back to more reasonable levels. Martin Gilbert, CEO of U.K.-based Standard Life Aberdeen PLC, calls the recent pullback "overdue & welcome," as well as "pretty healthy," CNBC reports. "Global economic outlook is improving but markets have got ahead of themselves, with asset prices indiscriminately inflated by years of QE (quantitative easing). There was an air of complacency," as CNBC quotes him.

Strategists at Credit Suisse, JPMorgan, and Charles Schwab, as well as Wharton School finance professor Jeremy Siegel, are among the prominent voices who also urge calm among investors and see a buying opportunity based on continued strong fundamentals. Peter Garnry, the head of equity strategy at Danish-based investment banking firm Saxo Bank, recently predicted a correction by the end of the first quarter, and told Bloomberg, "We believe this is a healthy correction in equity markets but also likely short-lived." (For more, see also: Why You Should Buy Into The Sell-Off.)

Looking at History

Since the start of the current bull market in 2009, there have been four corrections of 10% or more, the deepest and longest knocking 19.4% off the S&P 500 over the course of 157 calendar days in 2011, per Yardeni Research Inc. The most recent, per their analysis, was a 13.3%, 100-day pullback that ended in January 2016.

From when the long bear market spurred by the 1929 Stock Market Crash hit bottom in 1932, until the start of the present bull market, there were 27 other corrections of 10% or more, per Yardeni. Three of these included declines of more than 19%. The longest correction took the S&P 500 down by 19.4% over the course of 531 days from 1976 to 1978. The shortest was an 18-day, 10.6% dip in 1955.

Even bear markets can be short and sharp. The bear market that included the 1987 Stock Market Crash was a plunge of 33.5%, but it lasted only 101 days by Yardeni's reckoning.

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