Like any industry, financial media outlets love their jargon. But sometimes these technical terms can be confusing for the average investor.
For example, as of the close on Thursday, February 8, the S&P 500 had fallen 10.2% from its January 26 all-time high. This brought the equity market into what the investment industry calls a "correction," defined as a 10% peak-to-trough drop.
But according to Justin Waring, UBS CIO Americas Investment Strategist, the media may sometimes be unrestrained in its choice of words when describing market events. Some terms signal specific information about market movements, and the distinctions can carry important news value—others are used more flexibly, which can cause uncertainty or undue dread.
A 20% drop is known as a "bear market." Since World War II, every time the S&P 500 has seen losses of this magnitude, they have been accompanied by an economic recession. But this definition became stretched in recent months, when high-profile investors began to proclaim that we are in a "bond bear market."
The Bloomberg Barclays U.S. Aggregate Bond Total Return Index is a broad-based index that is considered a benchmark for the fixed income market. In the last 10 years, it hasn't dropped more than 5% from its all-time high. Even when interest rates were spiking in the late 1970s, the worst peak-to-trough drawdown was only 12.7%—its only-ever "correction" based on total return data since 1976.
"Throwing around a phrase like 'bear market' is certainly a good way to grab headlines and get on TV, but misusing that term could be harmful for investors that don't know the proper definition," says Waring.
Waring also offered definitions for other widely used terms: "A 'drawdown' is simply any period when an investment isn't sitting at a record high—this shouldn't be a cause for alarm, since they are common even when markets are trending higher."
The news will use other phrases—like "dip," "selloff," "reversal," "pullback" or "slide"—to talk about any downward move in prices. "There's no set definition of magnitude for these phrases, and it's important to remember that a 'big' percentage change for one asset class may be a relatively minor move for another asset class. Going back to the bond market's once-in-a-lifetime drop of 12.7%—the stock market sees a drop of that magnitude about once per year on average—context is important and investors shouldn't panic—sharp selloffs tend to offer more opportunities than forward-looking risks," Waring added.