Pullback, Correction, Bear Market? What do they mean?


What’s the difference between these investment terms: pullback, correction, and bear market? The investment industry has an amazing amount of jargon for every aspect of the business. These three terms are related to any market’s current prive versus where it was recently. They are related to a drop in the markets and they tell investors and traders how far the market has dropped from it’s recent highs.

Definition of a **pullback**: a drop of 7% or more from recent highs. I consider pullbacks healthy an expect to see as many as a half dozen throughout the year. The challenge with pullbacks, especially post-financial crisis, is that investors are very nervous about them becoming corrections.

Definition of a **correction**: a drop of 10% or more from recent highs. I also consider a correction to be a healthy exercise for the markets. In a typical year, we would have one move lower into a correction. If the investors are paying attention, they begin to buy at these depressed levels, thereby ending the correction. If the market was just too far ahead of itself, then it could continue to drop into a bear market.

Definition of a **bear market**: a drop of 20% or more from recent highs. Bear markets aren’t fun and occur about once every five years. They are usually brought on by overpriced stocks (a hot market) or by economic slowdowns or political unrest. The more nervous investors get, the less they value stocks. The more stocks drop, the more nervous investors get, so they value stocks even less. I know. It makes no sense.

The caveat here is that there is no such thing as a normal market! Markets ebb and flow because investors are emotional humans (along with the robot trading software programs that were written by humans.) As long as emotions rule the day, then achieving rationality is nearly impossible.

These definitions, nor the market conditions they represent, do not predict the future, but for long term investors, they can give a good reminder that it’s time to make another deposit into your accounts.