Fears versus Reality

Historically, corrections become bear markets when fears become reality.

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Fears versus Reality
Welcome to the Know the Difference Minute for Thursday, October 26th.
When the broad equity market falls 10% it’s called a correction. When it falls 20% or more it’s called a bear market. Those are arbitrary labels, but historically, corrections become bear markets when fears become reality.
The label “correction” is interesting. The price needs to be corrected towards the fundamentals of future cash flows. But corrections can hopefully turn to a correction to the upside if fundamentals prove to be better than feared.
The fears that drive a correction are often around growth, inflation, and geopolitics. We have lots of all of that right now. Does the fear about growth turn into the reality of a recession? Does the fear of inflation coming back become a reality? Does the fear of a geopolitical event become the reality of it spreading?
That’s what the market is wrestling with.
I’m Brian Jacobsen, Chief Economist at Annex Wealth Management. That is your Know the Difference Minute.