What’s Going On Here?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. What Does This Mean?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. Why Should I Care?The bigger picture: Get out! Get out!
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.
For markets: Feelin’ lucky, punk?
There was also 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 (tweet this). 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… | 