What is a recession? What is a crash? What is a correction? What is a bear market? Is this Coronavirus sell-off a correction or crash? Some questions we can answer. Some we can only guess at. But the following is a guide to understanding the history and the terminology of market downturns so we can put the current Coronavirus (crash or correction) into context.
What is a Correction?
A drop of 10% or more from a previous high is typically referred to as a correction. Corrections are not unusual. Since 1980 market corrections of 10% (or worse) have occurred almost every year and despite this, the S&P 500 has delivered a positive annual return in 75% of all those years. Every major stock market in the world has suffered a 10%+ correction in 2020.
What is a Crash?
A stock market crash has no definitive definition but is generally accepted to be a sudden and dramatic decline of share prices across a broad section of a stock market. On Monday March 9th, the Dow Jones fell 2,014 points, the largest point drop in its 123 year history. This 7.8% decline was the second biggest, in percentage terms, since Black Monday in 1987. At the time of writing, the S+P 500 has declined 24.5% in just 8 days. Most commentators have described this as a market crash.
What is a Bear Market?
A bear market is usually defined as a 20%+ downturn in stock prices over at least a two month period. Today, March 12th, stock markets in the US and Europe (and Japan but not China) are ‘in bear market territory’ but unless they stay at or below these levels for two months or more, they may not be recorded as bear markets. Bear markets generally come once every five to six years – the current bull market has lasted eleven years.
What is a Recession?
The official definition of a recession is a fall in GDP in two consecutive quarters. Recessions occur around every nine to ten years. The stock market is not the economy but bear markets are associated with recessions (or vice versa) two out of three times. The last recession, the so called Great Recession, was eleven years ago.
What is this?
We have clearly had a correction and a crash, and a bear market is guaranteed if stock markets stay down for a few months. A recession obviously depends on Q1 and Q2 GDP data and it is of course very possible that consumer demand (and production / supply) is hit hard enough by the impact of Coronavirus to cause a recession. What is heartening is that the two big recessions and bear markets (in terms of breath, depth and length) of the last hundred years, the Great Depression and the Great Recession, have been where the hit to the economy is exacerbated by the failure of the banking system. Of 27 bear markets since the 1800s, the average decline has been 38% with a 60 month trough to recovery. But event-driven bear markets (like this one?) saw a 29% drop with a 15 month average time to reclaim the previous peak.