The Coming Bear Market?
The US stock market today looks a lot like it did at the peak before all 13 previous price collapses. That doesn't mean that a bear market is imminent, but it does amount to a stark warning against complacency.
NEW HAVEN – The US stock market today is characterized by a seemingly unusual combination of very high valuations, following a period of strong earnings growth, and very low volatility. What do these ostensibly conflicting messages imply about the likelihood that the United States is headed toward a bear market?
To answer that question, we must look to past bear markets. And that requires us to define precisely what a bear market entails. The media nowadays delineate a “classic” or “traditional” bear market as a 20% decline in stock prices.
That definition does not appear in any media outlet before the 1990s, and there has been no indication of who established it. It may be rooted in the experience of October 19, 1987, when the stock market dropped by just over 20% in a single day. Attempts to tie the term to the “Black Monday” story may have resulted in the 20% definition, which journalists and editors probably simply copied from one another.