After ending the year 2020 in continuous growth the Zimbabwe stock exchange picked up on the same trend in early 2021. The growth that ZSE had shown in 2020 for investors was so attractive it stirred interest in people who had never considered investing in the ZSE before. Life was great for January and February then boom! Somewhere in the middle of March prices started to drop. Not alarming at first but as it continued people got jittery. Was this a market correction? Was this a bear run? But hold on, what is a market correction? What is a bear run? To understand these terms we have to look at a few things first.
The graph above depicts the movement of the total ZSE market capitalisation (value of all shares) in March, using the last trading day of February 26 February as a starting point. As we can see the market continued to rally (bull run) until the second week of March were first there was a momentary blip and then it peaked on the 12th before a massive downward slide that finally showed signs of reversal on the 25th and 26th. What is difficult for investors is to know whether or not they are going through a market correction or a bear run. Let’s define these terms so we can understand them and apply them to our market situation.
Let’s start on a positive note. In a previous article, the bull terminology was explained but in short, it means rising prices and was coined so because bull charge when in a fight. So a bull run refers to times of increasing prices across the market. Individual counters go up and down all the time but the terminology is used to refer to the market. There is no definitive time for a bull run as they can run for very long in the right conditions. A good example is the ZSE which as you can see in the long term chart had been on a bull run for a few months.
To understand a market correction fully we will have to delve into behavioural finance a little bit. Fortunately, we have a perfect example in the ZSE. A market correction occurs when the price of a commodity (shares in our case) experience a rapid change in the price due to changes in market forces. Looking at the ZSE chart we can see that the drop in prices was proceeded by a time of rising prices. According to ZSE Chief Executive Justin Bgoni, the market experienced a surge in retail investor numbers at the beginning of the year. Now here comes behavioural finance; people come to the stock market to make money. You knew that. These investors are energised with past performance and are inclined to pay more to convince holders of desired stocks to let go of them. They tend to push prices up to a point where prices are beyond the value that holders are willing to accept to let go taking profit in the process. This precipitates a situation where selling pressure overrides buying pressure and prices decline. A market correction is classified as a drop of between 10 and 20% in prices.
Bear runs are classified as cases where the prices in a market drop for an extended period. The difference with a market correction is the severity of the price drop. In bear runs the price drop can be 205 or greater from an academic perspective. They can also be defined by the duration of the price decline but this is less definitive. A 20% drop in the value of your investment is obviously a lot to bear, no pun intended. Similar to a bull run, the bear run gets its name from the tendency for most bears to fight while retreating and swinging their hands downwards.
So what just happened on the ZSE?
As mentioned before from an academic perspective a market correction is between 10 and 20% decline and anything beyond 20% is a bear market. In our case, the decline from the peak (ZW$ 551 100.91m) to the valley (488 888.97) was 11.28%. This is firmly in the market correction territory. And just for good measure, the chart shows that a recovery is on the cards. A rapid recovery by the looks of it.