almost 4 years ago • 2 mins
US stocks had their worst week since the 2008 financial crisis, and that earned them a new record late last week: the fastest “correction” in history 🏃♀️
A market correction happens when stocks fall from their most recent peak by more than 10%. For the US stock market, that peak was when stocks hit a record high on February 19th, and that fall was the 12% it lost over the next six business days. All in all, it marked the fastest ever correction in the US stock market.
There’s nothing particularly special about 10% itself: it’s just a threshold used to show when investors have turned pessimistic about the market. The next threshold they look at is a drop of more than 20% from a recent peak. If, heaven forbid, that comes about, US stocks will enter what’s called a “bear market” 🐻 Grrr.
A bear market is different from a recession, which is when an economy shrinks for two consecutive quarters. Stocks can enter a bear market for any number of reasons, but one of the most common is the expectation of a recession. That makes sense: stock prices reflect what investors think companies are worth based on their future earnings potential, and recession-wary investors are more likely to expect future earnings to fall 🤓 And that, in turn, will probably hit current stock prices.
There was another “yield curve inversion” last week too. In other words, yields on short-term government bonds are now higher than those on longer-term bonds. Given that an inverted yield curve has preceded all 9 recessions since 1950, investors often use it to predict the arrival of a recession within the next 24 months. It’s been wrong on a couple of occasions, sure, but glass-half-full investors are getting harder and harder to come by these days…
Disclaimer: These articles are provided for information purposes only. Occasionally, an opinion about whether to buy or sell a specific investment may be provided. The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment advisor.