Why Does -20% = Bear Market?

Battered by Oil, Dow Touches Bear Territory (New York Times)
Dow Hits Bear-Market Territory (Wall Street Journal)
Stocks Near Bear Market Territory (U.S. News & World Report)
US stocks post sharp weekly losses; bear market nears (MarketWatch)
This Bear Has Sharp Claws (Barron’s)

Market ends lower, Dow on cusp of bear market (Reuters) 
Stocks Tumble Toward Bear Market On Rising Economic Concerns (Washington Post)


The latest commentary I seem to be having a hard time with is this weird obsession with minus 20%. What makes this number, as opposed to 15%, 25%, or even 36.54% special?

Consider this somewhat bizarre commentary:

Stocks fell on Friday, pushing the Dow to the brink of a bear market, hounded by concerns that record oil prices and the seemingly endless credit crisis will further damage the economy. Friday’s decline built on Thursday’s rout in which the Dow fell about 360 points, and rounded out its worst week since February 10.

While the blue-chip Dow average briefly dipped into bear market territory, it managed to close above that level, thus narrowly avoiding the official onset of a bear market, or a 20 percent drop from its all-time high.  (emphasis added)



What is the magic about 20%?

What makes this the "official" onset of a bear market? There isn’t any NBER-like group that declares an "official" bear market.

Best as I can figure, the 20% number is a not-quite-a-random number — more than a 10% correction, less than a full blown crash (which for all we know, could be "offically" 30%).

I have no idea who first started bandying about these nice round base ten numbers — but for whatever reason, they seem to have stuck in the public and the press’ imaginations. (Anyone have a better idea where these two figures came from?)

Forget the rather squishy terminology, and consider the following economic, fundamental and technical questions:

• Is the Economy expanding or contracting? Have recent data points been improving or worsening?

• Are corporate earnings getting stronger or weaker? Where are we in the earnings cycle?

• Are stock prices generally rising or falling?

• Are market advances narrow or broad? Is the volume expanding on up days, or on down days?

• Is investor Psychology greedy or fearful?

Rather than focus on terminology, investors should be considering their risk management strategies, what they are doing to preserve capital, and how they are psychologically prepared to deal with what could be an extended downturn.

That matters a whole lot more than whether something is called a bull or bear market…


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