The widely accepted definition of a bear market is a decline of 20% or more from the bull-market high. By that definition, the S&P and the Dow aren’t officially in a bear market, (you wouldn’t have missed the flashing red headlines on CNBC or the big bold typeface on the front page of the paper) but for all practical purposes stocks are now in a bear market. Over 75% of the 3,000 largest U.S. companies are now down at least 20% from their highs. That’s a quorum by my count.
The small-cap Russell 2000 index has fallen 26% from its bull-market high. And as of last week, the MSCI All-Country World Index—the gold standard of global stock market indices—crossed into bear country. Emerging market stocks have long been in a bear market and foreign developed world equities arrived in bear territory last month.
Bear markets are no reason to be fearful. They help wring out the speculative excess in the market and reset the risk-reward for stocks. While all the excess hasn’t yet come out of the market, we now see many more shares on offer with prospective returns that are commensurate with their risk than we have in years. That’s no reason to get discouraged.