The great author and journalist Damon Runyon wrote in 1929: “We’re probably all going to permanently forget about the stock market for about another 20 years or so.” As you may have guessed by now, he was right. That very same year, known as Black Monday, saw a massive drop in U.S. stock markets as well as globally. Nearly 90 years later and we find ourselves in an almost eerily similar situation. This time around it is not just tech stocks that are taking a hit but pretty much all major stocks have been feeling the heat. The Nasdaq has also fallen below its 200-day moving average for the first time in almost two years.
What is a Stock Market Correction?
A stock market correction is a 10% fall from a previous high. It’s normal for the stock market to go up and down, but a correction is when the stock market has a big, sudden drop. When investors get nervous about the economy or their stocks, they sell because they think the stocks are going to go down. This causes stocks to go down, which makes investors even more nervous, leading to more selling. A stock market correction happens when selling is on a large scale. A stock market crash is a bigger, sudden drop in the stock market. A crash happens when investors are extremely nervous and there’s a lot of selling feeding on itself. A market crash can cause major economic damage.
Why is a Stock Market Correction happening now?
Well, the recent drop and fall below key averages have brought back memories of the dot-com crash, or the bursting of the tech bubble back in 2000. However, the real culprit here appears to be the war between Russia and Ukraine, with the S&P falling almost 20%, including a huge drop in tech stocks. These dramatic falls come as the FED reduces liquidity, raises interest rates, and energy supplies come into question. We are purposely slowing economies around the world because of inflation. The problem is that we could be looking at the equivalent of giving chemotherapy to a patient. We hope the toxic concoction delivered will have the desired outcome, but many times complications arise. This may end up causing more pain for businesses and consumers worldwide.
Why should you care about a stock market correction?
The stock market is a representation of the state of the economy as a whole and, in this case, we find ourselves amid a correction. That is to say that while the market has had a rough patch, it does not look like it’s in the midst of a full-blown crash or the start of a major economic downturn. However, should the markets continue to fall and hit a new low for the year, this would be a sign that a larger correction could be in the works. What this means is that if you have investments in the stock market, and we hit new lows, you may have to reconsider investments. Another consideration is your age and can you afford the risk of an extended bear market.
The problem with corrections is that they are confusing
Market corrections are largely a result of investor psychology, which can be difficult to predict. When stock prices rise rapidly, investors may decide that the increase is unsustainable and that a correction is due. This can lead to a rush for the exit as investors attempt to sell their stocks before the correction hits. This can cause further drops in stock prices as the number of shares being traded falls. If a correction grows into a full-blown bear market, the momentum for a fall can become self-perpetuating. Investors who are afraid of losing money may rush to sell their stocks, which causes stock prices to fall even more.
We may once again see stocks soar in the months and years to come, but you can be certain that there will be corrections along the way. It is when these corrections hit, however, that we are reminded of the sheer volatility of the stock market as a whole. You can be sure that there is going to be an extended bear market, but you also have to be ready for it. There is no doubt that the stock market will continue to rise in the years to come. FEL-PM-220728
Trading futures and options involves substantial risk of loss and is not suitable for all investors. Past performance is not necessarily indicative of future results. This matter is intended as a solicitation to trade futures and options.