..

The Conversation

  • Written by The Conversation Contributor
image

If you have just come back from a summer break, or had switched off your communication devices at home, you may have missed the fact that 2016 has opened with a run of losses on global stock markets, many now exceeding more than 20% from 2015 highs.

Let’s leave aside for the moment what might be driving this current dip in stock prices, and ask one small technical question: what is the difference between a market correction and a bear market?

The answer is that a correction describes a short-term dip in stock prices, while a bear market is a longer-term downward trend in prices, normally one that drops more than 20% from a peak. In a correction therefore, the expectation is that prices will stabilise or even rise again in the future. In a bear market the expectation is that prices have fallen and may continue to fall for the foreseeable future.

So how can we be talking of a bear market only a few weeks into a new year, based on a run of a few poor days for global stock markets? Here things get tricky because some markets are indeed now much more than 20% off their 2015 highs, even though it has taken only a few weeks to get there.

Even more confusing is the fact that many market analysts are actually still predicting stock prices to rise over the course of this year. So if professional investors can’t even agree on the direction of the stock market, what sense can ordinary punters make of warnings that we may be in or entering a bear market, or that this is just a January correction, and the market will recover later in the year?

The difference between a correction and a bear market is thus more ambiguous than at first encounter. The categories of bear market and correction were developed in quieter times, when asset prices were less volatile, and fewer people were exposed to movements in stock market prices. If you do not need to sell stocks to live on, then a six month or even one year slide in stock prices may not be all that significant and you might see it as a correction. But if you need to sell shares or are about to retire and need to calculate your superannuation payout, then even a few weeks fall in prices may start to look like a serious bear.

Part of the current confusion is also that for the past seven years central banks have been pouring money into financial markets to stabilise asset prices and stimulate growth. The price of money has fallen to almost zero, and so its been hard to price risky assets like corporate stock. But with the US Federal Reserve attempting to lift rates ever so gently, investors are having to learn to price risk in again.

We still don’t know what happens when risk gets priced into markets again. But already this year we can see that volatility is back as the new normal. Welcome to 2016.

Authors: The Conversation Contributor

Read more http://theconversation.com/sharemarkets-a-bear-market-a-correction-or-just-volatility-53366

Politics

Prime Minister interview with Alan Jones

Good morning Alan.   ALAN JONES: Thank you for your time. Could I just begin by saying that politicians rarely get praise. I have been speaking to farmers during the course of the weekend. You wen...

Alan Jones - avatar Alan Jones

Scott Morrison on Shorten's Border Protection backdown

Border Protection   PRIME MINISTER: Less than 24 hours ago, I warned Australia that Bill Shorten would make Australia weaker and the Labor Party would weaken our border protection. That they could...

Scott Morrison - avatar Scott Morrison

Funding to support women and children escaping domestic violence

Hundreds more women and children escaping domestic and family violence will have a safe place to sleep with a $78 million investment by the Morrison Government.   This investment includes a $60 mi...

Scott Morrison - avatar Scott Morrison

Business News

Why Branding is vital to your family owned business

Once available only to large corporations, branding is now more accessible and vitally important to every size (and type) of family business, including yours. But what is branding and how does it ...

Stella Gianotto - avatar Stella Gianotto

Statewide Super announce Tony D’Alessandro as CEO

Tony D’Alessandro Tony D’Alessandro will be the new Chief Executive Officer of Statewide Super, effective 1 March 2019. Mr D’Alessandro will replace Richard Nunn, who in January announced his ...

Media Release Service - avatar Media Release Service

Why ‘Handover Culture’ Doesn’t Exist in Australia – And Why It Should

Handing over a business to the next generation might seem like something that can wait, but Australian business is largely unprepared for succession – and that’s a problem.   Handover culture is t...

Andrew Williams - avatar Andrew Williams

Travel

Fun Things You Must Do In Perth

Perth: Sun, sand and 19 beaches might seem to sum up the city, but not quite. The sunniest capital city in Australia offers so much more for you to do. Regardless of what your idea of fun is, you wi...

News Company - avatar News Company

ex-HMAS Tobruk dive site Fraser Coast

Fraser Coast Has a New Sunken Treasure for Divers to Explore A rush of scuba divers from around Australia is expected to begin exploring the underwater wonderland created by the ex-HMAS Tobruk after...

Tracey Joynson - avatar Tracey Joynson

3 Steps to Make Your Dream of Working Abroad Come True This Year

Oh, the New Year. The time of year when anything seems possible and everything seems doable. For some people, nothing will change over the course of the next 12 months. For others, everything may. I...

Bevan Berning - avatar Bevan Berning