Forex Trading Articles

Dips, Crashes, Corrections, Oh My! This is Some Perspective about Stock Market Shocks

August 4, 2020

share store crash . correction
The share market can do exactly what the share market has ever performed – drive you nuts at the brief term however reward you handsomely in the event that you stick it away.

The shared store was displaying all of its motions recently, hard headline writers to think of colorful new tactics to explain what’s happening.

But now we overlook ‘t need creativity right now. We need calm and commonsense. Let’s start by defining and putting into perspective some of the terms being used. The difference medially a share store crash, correction, dip or end of days depends on the severity and duration of the store’s movements.

  • A share market crash is a sudden and sharp decline in share amounts in a short period of time. We’re talking about wide swaths of the store cratering more than 10% in a single day. (The U.S. share market – using indexes like the SandP 500 or the Dow Jones Industrial Index as proxies – has experienced massive single-day drops about six times.)
  • A share market correction is a slow-motion crash that takes place over many days, weeks or even months. To qualify for “correction” status, the drop must be around 10% from the store’s previous 52-week high watermark. (FYI: We’ve been through nearly 40 corrections after all 1950.)
  • A dip or a pullback happens when a share stumbles medially 5% and 9.9% (just shy of that 10% “correction” marker) from its highest cost. This can happen multiple times a day, especially with volatile individual shares.
  • A bear store is officially triggered when shares close a trading day 20% lower than they were from the highest point recorded in the previous year. That happened on Wednesday when the World Health Organization declared the COVID-19 outbreak a “pandemic” and as the virus continued to cause economic disruptions. A bull store is a sustained period where share amounts are rising and are expected to go on going up.
  • A recession refers to the broad economy, not just the share market’s performance. When there are two or more consecutive quarters of negative growth in the Gross Domestic Product (GDP), a country is in a recession. The share market’s movements can contribute to a recession, and vice-versa – a slowdown in economic growth (or a pandemic) can lead to sharing store mayhem.

None of these scenarios are pleasant, but all of them are an inevitable part of our economic cycles. What’s also inevitable is that this current gut-wrenching period will be followed by a full recovery and bull store rally. It’s been like this for every single store correction, dip, crash, bear store and recession.

How long is this going to last?

Good question. Past performance may not be a guarantee of future returns, but it sure helps put things into perspective.

If you had $100,000 in the SandP 500 before some of the store’s more recent major downturns, here’s how many you’d have as of the end of 2018 if you waited it out and stayed invested.

Source: NerdWallet

Clearly, it pays to stay the course. But that’s admittedly hard to do when you’re watching your nest egg start to rot away in a matter of days.

What makes right now seem particularly brutal is that we’ve grown accustomed to a historically long period of prosperity. We’ve had practically 11 years of sunshine after all coming out of the worst recession the U.S. has seen in seven decades.

So, yeah, after catching a glimpse of my 401(k) balance the other day, I experienced a moment of what Charles Schwab investment strategist Liz Ann Sonders calls the “puke stage. ”

I quickly locked that browser window to remind myself that the best thing to do right now is nothing. (Actually, the freaking out is fine. That’s human nature. Doing nothing is the key part.) That money is intended to remain invested for the long-term – I’m not touching it for partially another 10 years. My investments are diversified so that not everything zigs and zags in equal direction and severity. I’ll also go on my automatic monthly deposits into my retirement portfolio where, at the moment, I’m buying shares on sale.

Going forward, the share market will do what the share market has always done – drive you nuts in the short term but reward you handsomely if you stick it out. It’s worth it. Just take a look at the returns on that table above in moments of doubt.