5 minute read

Market volatility can sometimes feel like a rollercoaster ride. But not all market movements are created equal. If you're invested in a portfolio that's diversified across sectors and regions (like our General Investing portfolios), short-term fluctuations matter little when you consider the broader picture.

Still, understanding the differences between market movements – pullbacks, corrections, reversals, and bear markets – can help to put things into perspective.

The types of market movements

• Pullback: A short-term, mild decline of less than 10% from recent highs.

Pullbacks are common fluctuations within a broader bullish trend (more on this in our Simply Finance below) and usually resolve quickly. You’ll rarely see a year without pullbacks. In February 2021, the NASDAQ experienced a brief 8% pullback due to concerns about bond yields and inflation, but recovered soon afterwards.

• Correction: A more significant decline of 10% to 20% that can last for weeks or months.

Corrections signal underlying shifts in market sentiment, but they don't necessarily indicate a complete trend reversal. In September 2020, the S&P 500 saw a correction, falling just over 10% amid worries about overvaluation and a resurgence of COVID-19 cases. After a few weeks, the markets bounced back.

• Reversal: A change in the direction of a trend, such as a shift from a bull to a bear market, or vice versa.

Reversals mark a change in the direction of a price trend and underlying market dynamics. The sharp decline in March 2020 due to the COVID-19 pandemic was a dramatic reversal, with the S&P 500 falling over 30%. By April 2020, massive fiscal and monetary stimulus had helped the markets recover, returning to a bullish trend.

• Bear market: A prolonged decline of 20% or more that can last for months or even years.

Bear markets are characterised by persistent negative investor sentiment, and sustained selling pressure alongside a deterioration of economic fundamentals. The Global Financial Crisis, which began in 2007, is a prime example of a severe bear market. It saw a sharp and sustained decline in stock prices, amid a broader economic downturn.

A strategy for navigating volatility

While market fluctuations can be unsettling at times, they don’t have to be a constant source of anxiety. It’s important to look beyond the daily headlines and consider the duration, severity, and underlying sentiment of market movements.

Investing consistently – via dollar-cost averaging – mitigates the risk of timing the market and allows you to potentially capitalise on market fluctuations. By buying more when prices are low and fewer when prices are high, you can reduce your average cost per share over time.

🎓 Simply Finance: Market trend

A market trend is the overall direction in which a market is moving over a period of time. Just like a river, a market trend can be seen as the prevailing current, either moving upwards (a bullish trend), downwards (a bearish trend), or sideways (a flat or neutral trend).

Trends can last for days, weeks, months, or even years, and they are influenced by various factors such as economic conditions, investor sentiment, and global events.

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