By Jack Forehand, CFA, CFP® (@practicalquant) —
I have never loved the idea of defining bear markets using a narrow framework. The common definition is that US stocks are in a bear market when the S&P 500 closes more than 20% off its high, but I think that definition often misses periods that a more detailed look at the data would likely classify as a bear market.
The first problem with the common bear market definition is that the S&P 500 doesn’t always represent what is going on with the average investor’s portfolio. Looking at it in conjunction with other indexes like the Russell 2000 and NASDAQ can paint a broader picture. But even the return of those indexes sometimes doesn’t properly account for the pain the average investor is feeling.
To understand why this is, let’s take a look at the current market decline. The conventional approach to market declines would label what we are experiencing right now as a correction. And it barely even meets that definition, as the S&P 500 just slightly crossed the 10% threshold at its low point. But taking a more detailed look at what has been going on leads to a very different conclusion with respect to what many investors are experiencing.
Before we look under the hood to see what is going on with individual stocks, a look at other major indexes gives us some clue that the S&P 500 may not represent the degree of pain in the average stock. The fact that the Russell 2000 has already achieved bear market status (although it has bounced back since then) tells us small-caps have struggled relative to their larger peers. And the NASDAQ achieved bear market status on an intraday basis, but not on a closing basis (which is another problem with a rigid bear market definition). So investors overweight technology have been feeling more pain than the broader market too.
The Pain Beneath the Surface
But a look at the average stock shows even greater problems. As of the market low on February 23rd, the median stock in our investable universe (all stocks with market caps above $150 million and more than $2 million in daily dollar volume) was 25.6% off its high. That is well into bear market territory, and is greater than the decline we have seen in any of the major indexes.
Breaking down the data in others ways shows an even bigger contrast.
Here is the median decline by sector.
| Sector | Median Drawdown |
| Healthcare | 45.4% |
| Technology | 31.8% |
| Consumer Cyclical | 29.4% |
| Capital Goods | 25.1% |
| Basic Materials | 21.3% |
| Consumer/Non Cyclical | 17.7% |
| Financial | 13.2% |
| Energy | 11.5% |
As you can see, healthcare (particularly biotech) and technology investors have seen declines far exceeding the overall market
And if you divide the market based on valuation, you also see a stark contrast. The chart below shows the average decline by value decile using our value composite.
| Value Decile | Average Drawdown |
| Cheapest – 1 | 23.9% |
| 2 | 23.6% |
| 3 | 20.8% |
| 4 | 21.8% |
| 5 | 25.7% |
| 6 | 26.1% |
| 7 | 34.3% |
| 8 | 40.8% |
| 9 | 53.2% |
| Most Expensive – 10 | 50.8% |
The most expensive deciles have seen much more pain than the cheapest ones.
Another way to look at the degree of pain many investors have felt is to look at the percentage of stocks that have experienced a given level of decline.
| Decline Threshold | Percentage of Stocks |
| 30% | 42.7% |
| 40% | 29.5% |
| 50% | 22.9% |
| 60% | 15.6% |
Almost half our universe has seen a decline of at least 30%. Almost a third lost at least 40%.
Bear Markets Are in the Eye of the Beholder
So are we in a bear market now?
The answer really depends on what you are invested in. If you own the S&P 500, the data above might be interesting, but it also shouldn’t be of particular concern since your portfolio barely entered into correction territory at the low. If your portfolio isn’t market cap weighted and includes small-cap stocks, your pain has likely been much greater. And if you invest in technology stocks or expensive stocks, you are currently seeing a major bear market. In the end, like many things in investing, the definition of a bear market is really different for each investor. The current decline is a great example of that.
Jack Forehand is Co-Founder and President at Validea Capital. He is also a partner at Validea.com and co-authored “The Guru Investor: How to Beat the Market Using History’s Best Investment Strategies”. Jack holds the Chartered Financial Analyst designation from the CFA Institute. Follow him on Twitter at @practicalquant.
