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Pullbacks, Corrections, and Bear Markets

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As an investor, there’s probably nothing so unsettling as a sharp downturn in the market, especially one you weren’t expecting. Unfortunately, markets never go straight up, so uptrends and downtrends are a normal part of investing. But that doesn’t make them any less stressful.

When it comes to market downturns most of us in the analyst community group them into 3 distinct categories: Pullbacks, which are a downturn that is less than 10% from an all-time high. Corrections, which are a downturn that is more than 10% but less than 20% from an all-time high. And bear markets, which are a downturn that is 20% or more from an all-time high.

While any of these things could occur on an individual stock or within a particular market sector, usually when we talk about them we’re referring to a broad-based market index like the S&P 500 or SPX.

So, let’s discuss where we are currently. The current bull market has lasted more than 9½ years. The last record high in the S&P 500 was on September the 20th--and by the time the market bottomed out on Christmas Eve, the SPX had dropped -19.8%--just barely above bear market territory. Now, this is the second time since the current bull market began, way back in March of 2009, that we narrowly escaped a bear market by less than 1%. Back in early 2011 the SPX had a -19.4% correction, and that one lasted about 5 months.  

While it’s impossible to know for sure--since the SPX has now rebounded around 8%--it appears that this was just another deep correction. And since it lasted about 3 months, it was just a little bit longer than average. But the SPX will need to rally back above the original correction level of 2637--or around another 3%--before we know for sure.

Either way, as investors, we’ve been fortunate to have participated in the longest bull market in history. So, let me leave you with these important points. Every correction first starts out as a pullback, and every bear market first starts out as a correction. It’s impossible to know – it’s impossible to time the market perfectly and it’s impossible to know how far any downturn will go, until it’s over. While every investor has a different risk tolerance and different goals, the important thing is: Don’t panic, don’t let fear drive your trading decisions, and be sure you keep a long-term perspective. If there is one investing axiom that sums this up perfectly it’s this: “Time in the market matters a lot more than timing the market”.

Important Disclosures

The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The investment strategies mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision.

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S&P 500: a market capitalization-weighted index of 500 of the most widely-held U.S. companies in the industrial, transportation, utility, and financial sectors.


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