Stock price declines such as what occurred in early 2020 and the first half of 2022 can prompt some investors to blindly and indiscriminately sell investments when the entire market is trending lower. Worried investors may believe "this time it's different."
When the market drops, some investors lose perspective. Downtrends and uptrends are part of the investing cycle. When stock prices break lower in dramatic fashion, industry jargon can pervade headlines and news reports. What is the basis for some of the most common terms used to describe the market's momentum?
Exchange and Index
Let’s start by clarifying “the stock market.” Stocks are shares of ownership in publicly traded companies. Trading is the buying and selling of shares and that process is conducted within stock exchanges. Examples include the New York Stock Exchange, Nasdaq, and the Tokyo Stock Exchange.
A stock market index measures a stock market or a subset of the stock market. The index helps investors compare price levels with past prices in order to calculate performance. It is computed from the prices of selected stocks. Examples of U.S. stock market indices are the Dow Jones, S&P 500, Nasdaq and Russell 2000. With that background, we now turn our attention to jargon you may hear from time to time, especially when the markets are in decline.
Bull Markets, Pullbacks, Corrections and Bear Markets
A bull market occurs when stock prices are generally rising or are expected to rise. A pullback represents the mildest form of a selloff in the stock markets. You might hear an investor or advisor refer to a dip of 5% to 10% after a peak as a “pullback.” The next degree in severity is a “correction.” If a market or combination of markets retreats 10% to 20% after a peak, you’re in correction territory. At this point, you’re likely on guard for the next tier. In a bear market, the decline is 20% or more since the last peak.
Bull markets, pullbacks, corrections and bear markets are part of the investing cycle. Some investors second-guess their risk tolerance when stock prices are trending lower. But periods of market volatility can be the worst time to consider portfolio decisions. This is especially true if emotions swamp objectivity.
Pullbacks and corrections are relatively common and represent something that any investor may see from time to time, often numerous times over the course of a decade. Bear markets are much rarer. The length of bear markets varies, but the average is around five months.
A retirement strategy formed with a financial professional recognizes the potential for market volatility. In addition, an advisor with fiduciary accountability is not only focused on serving you and your goals, but also serves as a voice of objectivity when your emotions may be at their peak because markets have fallen from theirs.
The views stated in this letter are not necessarily the opinion of Cetera Advisors LLC. Due to volatility within the markets mentioned, opinions are subject to change without notice. Information is based on sources believed to be reliable; however, their accuracy or completeness cannot be guaranteed. Past performance does not guarantee future results.