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Bear market or correction? A lot rides on this shakeout

The recent stock market turmoil left a big question unanswered: Is it just a correction or a bear market? ¶ The wild swings — the Dow closed up or down at least 400 points for four consecutive days for the first time ever — left investors bruised and confused. If the drop was just a correction, as many investors later in the week bet on, then it was a great buying opportunity. ¶ If, however, it was confirmation the market is headed for bear territory, investors may be bracing for another recessionary slump that could keep stock prices depressed for months or years.

There's a simple definition of the two terms: A drop in equities of 10 percent or more indicates a correction, while a drop of at least 20 percent indicates a bear market.

By that definition, many of the global stock exchanges from China to Germany entered bear market territory, and the U.S. markets are close to joining them. But for a dramatic rally Thursday, we might already be there.

The "bears" think it's only a matter of time. The European debt crisis, rising U.S. debt and a shift to cutting government costs have increased the risk of another recession. Starting with unemployment above 9 percent, a double-dip recession could be worse than 2007-09 in terms of idling a greater percentage of workers.

On the other hand, an argument can be made that the United States is just going through an anticipated, albeit strong, market correction. The economy is still growing, though very slowly. New weekly unemployment claims fell below 400,000 for the first time in four months, pointing to a jobs recovery. Many corporations are cash-rich and have enjoyed higher profits this year.

And not every huge stock market fall precedes a bear market or recession. Market research firm Birinyi Associates looked at the 25 times the S&P 500 has fallen 10 percent or more since 1962. Nine turned into bear markets with a fall of at least 20 percent; 16 times, the S&P drop stopped shy of 20 percent and began recovering.

Correction Financial relief in sight

• A temporary drop in values can weed out overinflated and questionable stocks.

• Corrections act as a check on industry bubbles within the market.

• Investors can buy desired stocks at a lower price. Last week, analysts touted stocks like Nestle and Prudential as buying opportunities.

• If markets recover relatively quickly, it helps more savers pump up the value of their 401(k) accounts. That feeds on consumer confidence to spend more money, growing the economy.

• If the market was oversold through this correction, the bounceback could be more dramatic than many expect as long as the country does not fall into a double-dip recession.

Bear market Expect more economic turmoil

• Investor wariness over a recession could be self-fulfilling. Lower stock prices feed consumer and business anxiety. Lower consumer confidence leads to less spending, which leads to less demand. With demand down, companies produce less and employ fewer workers. The result: another recession.

• Depressed stock prices can make it tough for companies to: raise money or get credit from banks to expand the business; retain employees, particularly if they can't use stock options as an incentive; hold on to customers, who may lose confidence if they worry about a company's stability.

• The last cyclic bear market lasted 16 years, from 1966 to 1982. Some investors believe that we're well into a bear market cycle that began in 2000 and that the stock run-up between 2009 and the near-term peak last April was only a brief bear market rally. Based on past cycles, the current bear market could last until 2014 or 2015, some predict.

• It could be a while before market prices hit bottom, let alone begin recovery. It takes about 15 months to go from peak to trough based on an average of eight bear markets in the S&P 500 since 1956. The markets peaked just four months ago, which would indicate we won't reach a bottom until well into 2012.

Bear market or correction? A lot rides on this shakeout 08/12/11 [Last modified: Friday, August 12, 2011 7:55pm]
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