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7 February 2018
 |
| Wall street financial markets (The Total Investment & Insurance
Solutions) |
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." The Total
Investment & Insurance Solutions
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. The Total
Investment & Insurance Solutions
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. The Total
Investment & Insurance Solutions
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. The Total Investment & Insurance Solutions
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.The Total Investment & Insurance
Solutions
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