finance
Market Analysts Question Relevance of 20 Percent Bear Market Threshold
A financial commentary argues that the traditional 20 percent decline threshold for bear markets may no longer reflect meaningful trend changes given elevated valuations and expanded Federal Reserve balance sheets.
May 25, 3:15 PM·1m read1 source
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A commentary published on ZeroHedge examined whether the conventional definitions of market corrections and bear markets remain applicable under current conditions. The piece noted that the 10 percent and 20 percent thresholds originated with technical analyst Alan Shaw at Smith Barney in the 1960s.
It stated that markets at that time traded closer to long-term fair value, making a 20 percent drop more likely to signal a sustained reversal.
The commentary reported that the S&P 500 currently sits roughly 83 percent above its long-term trend line, while the Shiller CAPE ratio hovers near 40. It added that the Federal Reserve's balance sheet stands at $6.7 trillion, more than eight times its pre-2008 level.
Under these conditions, the article suggested that a 20 percent decline would represent a temporary pullback rather than a regime shift.
The commentary contrasted present conditions with two prior bear markets. It stated that the S&P 500 fell nearly 49 percent between March 2000 and October 2002, taking until 2007 to recover prior highs. It added that the index declined about 57 percent from October 2007 to March 2009, with recovery to prior peaks occurring only in early 2013.
The article concluded that the distinction between corrections and bear markets should focus on whether prices break their longer-term upward trend rather than on fixed percentage thresholds.
