As 2022 progresses, it seems like the stock market is only moving in one direction: down. Since the beginning of the year, the S&P 500 has declined by 13% while the Nasdaq Composite has declined by 19%. As a result, investors are wondering whether the current market situation places us in a correction, recession, or bear market. But, what do these terms even mean? Let’s jump right in.
What Is a Correction?
A correction occurs when the market declines at least 10% from its peak, but not more than 20%. The S&P 500 and Nasdaq Composite are both recognized as indices that represent the market as a whole. Furthermore, the S&P 500 peaked at $4,818 in 2021, while the Nasdaq Composite peaked at $16,221. Since the S&P 500 is down more than 10%, but not more than 20%, from its peak, it can be concluded that the S&P 500 is currently experiencing a correction. On the other hand, the Nasdaq Composite is down more than 20% from its peak, which places it into bear market territory.
What Is a Recession?
A recession is defined as period of time when economic activity, measured by gross domestic product (GDP), declines for two consecutive quarters. However, a recession has different meanings depending on who you ask. According to the National Bureau of Economic Research (NBER), a recession occurs when the economy experiences a “significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales.” In addition, the NBER is the official entity that declares recessions.
U.S. GDP increased from Q2 to Q3 and also from Q3 to Q4. Unfortunately, current macroeconomic conditions concerning inflation, supply chain problems, and the Russia-Ukraine war has placed many investors on edge about economic activity. To that end, U.S. GDP for Q1 is expected to be released on April 28.
What Is a Bear Market?
Meanwhile, a bear market occurs when the market declines at least 20% from its peak. So, for the S&P 500 to enter bear market territory, the index must decline at least 20% from its peak, which would be around $3,854. For the Nasdaq Composite to enter bear market territory, the index would have to decline to at least $12,970, which it has already done. Bear markets can run for a few weeks, or for several years; the average bear market lasts for 9.6 months.
Since 1928, the S&P 500 has experienced 26 bear markets. On average, stocks lose 36% of their value each time. Fortunately, a bear market isn’t the end of the world. This is because bull markets have always subsequently followed a bear market. During bull markets, stocks gain an average of 114%.
On the date of publication, Eddie Pan did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.