Volatile market a good time to brush up on financial terms
With global stock markets suddenly volatile again, investors might need a refresher on some of the terms being thrown around.
First off, the markets didn’t crash. While the 1,175 point drop Monday in the Dow Jones industrial average might sound like a collapse, the decline was less than 5 percent. It was nowhere near as severe as the Dow’s most well-known, one-day drop of 508 points, or 22.6 percent, on Oct. 19, 1987. Crashes generally unfold over a longer period, with a succession of sharp declines.
The fact is, even with the recent selling, the market didn’t even suffer a “correction.”
A correction happens when a stock, bond, commodity or index declines 10 percent from a recent peak. In early trading Tuesday, the Dow Jones industrial average briefly fell 10 percent below its most recent record of 26,616.71 set on Jan. 26. However, most market watchers wait until the market has closed for the day before declaring that an index or other measure has officially entered a correction. The Dow ended the day higher by 567 points.
So far, the Dow, Standard & Poor’s 500 and Nasdaq have not fallen enough to be in a correction.
Corrections are common during bull markets. The most recent correction ended in February 2016, according to S&P Dow Jones Indices. Two years is an unusually long time for the market to go without one.
A bull market is generally defined as an increase of 20 percent or more in broad stock indexes such as the Standard & Poor’s 500. Experts date the current bull market to early March 2009. That’s when stocks began climbing back from their steepest declines of the financial crisis. The S&P 500 has more than tripled in that time.
A bear market happens when stocks decline over a prolonged period, with the same 20 percent threshold. The last bear market stretched from October 2007 to March 2009, after the housing bubble burst.
The sell-off in U.S. stocks this week spread to markets in Asia and Europe, reviving use of the term “contagion,” which was widely used during the European debt crisis early this decade.
When financial analysts talk about contagion, they mean when market disturbances spread from one economy or region to affect others.
Some of the sudden plunge in the U.S. markets on Monday was pinned on algorithmic trading, which is when computers are programmed to follow specific instructions to place trades. The computers can make the trades faster and more frequently than human traders can. During a 15-minute stretch, the Dow plunged 850 points and then recovered almost all of it.