Yesterday was a brutal day for investors. Markets across the board were in turmoil, with the S&P 500 falling over 10% during intraday trading (before a slight recovery in the latter part of the session). This led many to fear that we were entering a market correction, or at worst, a total market crash.
But what do these terms mean, and what can the past tell us about similar market turmoil? Here’s what you need to know:
- What is market correction? Traditionally, a market correction has been defined as “a 10 percent drop in a stock from its most recent high”. according To the new York Times, The S&P 500 fits that definition sometime tomorrow. It had at one point fallen 10% from its January 3 high.
- What is a market crash? A market crash, on the other hand, is a fall of more than 20% in the market, according To Luck, This decline can happen in a single trading period. Crashes are considered worse than corrections, not only because of sharp declines, but because they often signal the start of a bearish and bear market.
So what does yesterday’s correction (remember, it was more than 10% but less than 20%) tell us about the future? Unfortunately, you cannot predict the future of the market based on one day trading, but there are a few things to keep in mind.
Firstly, a. based on report good From CNBC in 2020, there have been about 30 market corrections since World War II. The average correction saw the markets fall 13.7%. However, recovery takes place on average, about four months after the onset of improvement, and sometimes very quickly. Although history cannot be a guide to future market performance, the relatively short period of past market corrections can put your mind at ease.
Second, even if a market correction extends to a market crash and a bear market, data from First Trust Advisors (via) raymond james) shows that, historically, bear markets are relatively less frequent than bull markets. The average bull market lasts 8.9 years, but the average bear market only lasts 1.4 years.
In such a situation, is there any relief from the worries of investors? Again, this is a difficult question to answer. But we may see more certainty in the markets after the Federal Reserve’s monetary policy meeting on Wednesday, in which the Fed is expected to announce its plan to raise interest rates.