Markets Why Routine Stock-Market Declines Make Investors Crazy
Many of us are sure disaster awaits, even though that almost never happens.
Bloomberg, April 10, 2019
The psychology surrounding stock-market declines and recoveries is fascinating. Anytime markets retreat even a little bit, the noise surrounding the event begins to swell. Given how frequently markets twist and turn, you might expect people would be used to the occasional plunge by now.
Alas, that simply is not the way human emotions and memory work.
As of today, the Standard & Poor’s 500 is a few points away from the all-time high set in September. Lest we forget, there was a 20 percent or so fall from those highs, and a 25 percent move up to close in on that peak. Neither the angst of the decline nor the bliss of the recovery are in any sense of the word rational. As we close in on that prior mark, it might be helpful to consider some details on what pullbacks, corrections and bear markets actually look like — and why we deal with them so poorly.
First, an important caveat: the terms drawdown, correction, pullback, retracement, recovery have no formal definitions. They’re just terms made up by traders and pundits. The convention is 5 percent is a pullback, 10 percent is a correction and 20 percent is a bear market, though these categories have no real meaning.