Q&A: What does it mean when stocks enter a 'bear market'

The Bull and Bear Statues at the Frankfurt Stock Exchange in Frankfurt, Germany. Photo / 123RF

Wall Street's sharp downturn beginning in October has pulled the Nasdaq composite index into what's known as a bear market.

The benchmark S&P 500 index is in what Wall Street calls a correction, and is headed toward a bear market, threatening to end the more than 9-year US bull market run.

Here are some common questions asked about bear markets, corrections and what it means for average investors:

How is a bear market different from a market correction?

A correction is Wall Street's term for an index like the S&P 500, the Dow Jones Industrial Average, or even an individual stock, that's fallen 10 per cent or more from a recent high. A bear market occurs when the index or stock falls 20 per cent or more from the peak.

Corrections are common during bull markets, and are seen as normal and even healthy. They allow markets to remove speculative froth after a big run-up and give investors a chance to buy stocks at lower prices.

The S&P 500, Dow and Nasdaq entered a correction this month. The Nasdaq slid into a bear market Friday as a sell-off in Apple, Google's parent Alphabet and other big names weighed on the technology heavy index.

It's the first year since World War II that the S&P 500 has had two corrections in the same calendar year.

All told, the Dow fell 414.23 points Friday to 22,445.37. That's 16.3 per cent below its record close of 26,828.39 on October 3. The S&P 500 index slumped 50.84 points to 2,416.58. It's now down 17.5 per cent from its high of 2,930.75 on September 20. The Nasdaq tumbled 195.41 points to 6,332.99, or 21.9 per cent below its peak of 8,109.69 on August 29.

What's bothering investors?

Many investors are growing worried that corporate profits - which drive stock market gains - are poised to weaken.

Profits have been extremely strong this year, thanks largely to tax cuts: earnings for the S&P 500 rose 21.7 per cent in the third quarter after a 25.2 per cent gain in the second quarter.

But an array of threats to company earnings has emerged in recent months, from interest rate hikes by the Federal Reserve to the Trump administration-led trade war. And there are increasing signs the global economy is slowing, too. Growth in China for instance has weakened and the German economy had its first quarterly decline since early 2015.

How often do market corrections become bear markets?

In the S&P 500, the index that investors pay the most attention to, there have been 22 corrections since 1945, not including the current one, and 12 bear markets, for a total of 35 major downturns, according to S&P Dow Jones Indices.

That works out to corrections becoming bear markets a little less than 40 per cent of the time.

When was the last time we had a bear market?

The last bear market for the S&P 500 ran from October 9, 2007 through March 9, 2009. In that 17-month period, as the US housing downturn and mortgage crisis erupted, triggering a credit crunch, the index fell 56.8 per cent.

How long do bear markets last and how deep do they go?

On average, bear markets have lasted 14 months in the period since World War II, while market corrections have lasted an average of five months. The S&P 500 index has fallen an average of 33 per cent during bear markets in that time. The biggest decline since 1945 occurred in the 2007-2009 bear market.

What are the signs that a correction or a bear market has ended?

Generally, investors look for a 20 per cent gain from a low point as well as sustained gains over at least a six-month period.

On average, bull markets last 4.5 years. The current bull market has been going on for almost 10 years.

The shortest bear market for the S&P 500 was in 1990. It lasted almost three months, sliding 20 per cent in that period. The longest was a 61-month bear market that ended in March 1942 and cut the index by 60 percent.

- AP