Market Correction
A market correction is a significant drop in the value of a stock market or index, typically defined as a decline of at least 10% from a recent high, but less than 20% (which would be considered a bear market).
Duration: Market corrections are typically short-term trends, often lasting a few months.
Market Correction vs. Market Crash: A market crash is a sudden and very sharp drop in stock prices, often occurring within a short period, like a single day or week.
Market Correction vs. Dip: A dip is a brief downturn from a sustained longer-term uptrend, while a correction is a more significant and sustained decline.
Bear Market
A bear market is a prolonged decline in stock prices with the major indices falling by 20% or more from their highs.
Duration: Since 1950, the S&P 500 index has declined by 20% or more on 13 different occasions. The average stock market price decline is -32.73% and the average length of a market crash is 338 days. However, and this part is critical, the bull markets that follow these crashes tend to be strong and last much longer.
Recession
A recession, according to the National Bureau of Economic Research (NBER), is a “significant decline in economic activity that is spread across the economy and that lasts more than a few months”.
Key Indicators:
- Decline in Real GDP: A sustained reduction in the total value of goods and services produced in a country.
- Rise in Unemployment: A significant increase in the number of people who are unemployed and actively seeking work.
- Slowed Industrial Production and Retail Sales: A decrease in the output of factories and the amount of goods sold to consumers.
- Decline in Real Income: A decrease in the purchasing power of individuals.
Duration: Recessions typically last for several months, but the NBER notes that most are brief.
Impact: Recessions can lead to job losses, reduced consumer spending, and a general slowdown in economic activity.
Recession vs. Depression: While both involve economic downturns, a depression is a more severe and prolonged recession.
The Dead Cat Bounce
In Trading, a dead cat bounce is a small, brief recovery in the price of a declining asset. Derived from the idea that “even a dead cat will bounce if it falls from a great height”, the phrase is also popularly applied to any case where a subject experiences a brief resurgence during or following a severe decline. This may also be known as a “suckers rally”.
Written by Michael DiGioia, Director of Education
Mike is available for One-on-One Coaching. Learn More
