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What’s a Market Correction?

February 08, 2018

  • Markets enter correction territory when they fall 10% or more from a previous high.
  • 10% drops occur about once a year during normal times, according to experts
1 min read

On Thursday the stock market officially entered correction territory, with the Dow Jones Industrial Average index plunging more than 1,000 points in afternoon trading.

The S&P 500 and the Nasdaq, two other key indexes, also fell by about 4%, according to reports. They also experienced corrections.

So what is a correction?

Markets have corrections when they fall 10% or more from a previous high. The Dow and other indexes have been on a wild ride all week. On Monday, the Dow fell 1,200 points–it’s biggest single-day point loss in history–but the index then regained much of what it had lost by Wednesday.

So here’s the math on Thursday’s close: The Dow ended its session at 23,849. In January, it reached a record high of 26,616, meaning the Dow has now fallen by more than 11% from its previous high.*

Indexes enter a bear market–a more serious occurrence–when they drop 20% or more, as happened in the months following the financial crisis in 2008 and 2009, when equities lost approximately half their value.

In and of themselves, corrections aren’t something for investors to panic about, according to experts.

In fact, 10% drops occur about once a year during normal times, Savita Subramanian, head of the United States Equity and Quantitative Strategy team at Bank of America Merrill Lynch told the New York Times on Thursday.

What’s causing it?

Some of the factors causing indexes to fall recently are fears about rising interest rates, inflation, and a strong employment picture where wage growth could cause inflation to rise.

The Federal Reserve, the nation’s central bank responsible for setting monetary policy, has been increasing interest rates for the past few years. It did so in twice in 2017; And it’s expected to raise rates again in 2018.

Businesses, investors, and financial experts fear that rising interest rates and inflation could have a negative impact on the economy and the stock market.

Source: Yahoo Finance, February 8, 2018

By Jeremy Quittner
Jeremy Quittner is the financial writer for Stash.

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