As financial markets suddenly get more volatile or turn lower, we need to be careful about not over stating the nature of changes – otherwise we will miss or ignore the really important events

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Let’s get our terms right.

Financial markets are suddenly more volatile. We seem to be facing some rather large changes in international markets, and in local markets too.

There are questions about where New Zealand property markets are headed.

Descriptions of what is happening are needed, but loose terminology will only make things confusing.

It is easy to use extreme terms for changes that are modest. Partisan politics in the US and Eastern Europe are places where the silly use of inaccurate terms are fuelling unnecessary fears.

So here is what we should use when we describe changes in economic and market levels.

A pullback

A pullback is when a price or index retreats -5% to -9.99% from a peak. They are often viewed as healthy and as buying opportunities.

A correction

A correction is where a market price falls by at least -10% from its 52 week high.

For example, between September 21 and October 29 the S&P500 fell -10%, the largest fall in the past year. That is a correction. But it since recovered and is now down just -7.0% so it is no longer in ‘correction’ territory

A bear market

A bear phase is when a market is down -20%.

For example, the Shanghai stock exchange index, which is now at 2676 is -24.7% lower than its 52 week high of 3558. That is a market firmly in a bear market.

A crash

A crash is when a market falls -10% in one day. It is not a longer running decline. A crash is an acute event, not a chronic one.

A slump

Slump is an informal term for a sharp decline in business activity, trade or market values. Slump is a very flexible term in that is used to describe both a short, sharp decline as well as a more gradual, prolonged period of low activity or value. Basically, it not a technical term at all.

A dead cat bounce

Also not a technical term is a dead cat bounce which refers to a short-term recovery in a declining trend. It derives from an old saying: even a dead cat will bounce if it is dropped from high enough.

A bull market

This is the opposite of a bear market, when prices or values rise for than +20% above their 52 week low.

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