Saturday Finances—Stock Market Corrections

I'm no expert.  I'm just paying attention.

Stock Market Corrections

Tahoe bear country_photo by tin

A correction is a decline in value or downward movement of a stock, bond, commodity or market index.  It occurs over a period of days, weeks or months from a 52-week high.

  • Pullback:  5% - 10% decline
  • Correction:  10% - 20% decline
  • Bears:  20% & over  
  • Garden variety bear:  20% - 40%
  • Mega-Meltdown bear:  40% & over

What's a stock market crash?

A crash is a 10% or more decline in value that occurs all in one day (Dow, S&P 500, NASDAQ).

Crashes are caused by panicked sellers in the wake of economic events, catastrophes, and crises.

Crash of 1929

A 4-day event during which shares fell in value by 25%
  • Thursday, October 24: 11% decline
  • Friday, October 25:  Values rose; sales were triple the normal volume as buyers snapped up bargains
  • Monday, October 28:  13% decline
  • Tuesday, October 29:  11% decline

The Dow did not return to pre-crash levels until 25 years later on 23 November 1954

The Dow lost 90% of its value between its high on 3 September 1929 and its low on 8 July 1932

The Crash of 1929 was triggered by a series of economic events.  
  1. The Hatry case in which British financier, Clarence Hatry, used fraudulent collateral to purchase $40 million of United Steel.  When the SEC (Stock Exchange Committee) caught him borrowing $1M on worthless paper, it caused a drop in the British stock market;
  2. Panic over short selling; 
  3. Panic over margin sellers;
  4. Rampant speculative buying and selling

On 19 October 1987 the Dow Jones Industrial Average (DJIA) dropped 22.51% by 508 points, the largest one-day percentage drop in stock market history.
  • It took 2 years for the Dow to regain the loss
  • The S&P 500 fell 20.4% dropping by 57.64 points
The crash was a result of bad economic policy and fear among traders over the impact of anti-takeover legislation that was moving through the House Ways & Means Committee.  

Introduced on October 13, the bill proposed to eliminate the tax deduction for loans used to finance corporate takeovers.  The tax deduction provision was stripped from the bill before it was passed on October 15.

In addition, computer trading programs were set to automatically call in sell orders when the market dropped a certain percentage.  These programs triggered all at the same time overwhelming the NYSE.  Trading was halted because there were not enough buyers for some stocks.

Also, Treasury Secretary, James Baker, announced on October 16 that the U.S. was considering a plan to let the value of the dollar fall in order to make U.S. stocks cheaper for foreign investors.  

Baker thought that a lower dollar would help slow the rise in the U.S. trade deficit.  Instead, the announcement prompted foreign investors to start selling dollar-denominated assets.

Crash of 2008
  • September 29, 2008:  A 777.68-point drop in the Dow, the largest point drop in the history of the New York Stock Exchange
  • Between its high on 9 October 2007 and its low on 4 March 2009, the Dow lost 50% of its value
  • The Dow reached a higher than its previous high on 24 July 2009 due largely to the government stimulus plan

The Crash of 2008 was triggered when the Bailout Bill failed in the Senate, prompting widespread panic among nervous investors following the sub-prime mortgage crisis.      

Corrections Happen
10% market corrections are relatively common and happen about a third of the time.  

Depending on which market index and which chart you're looking at, they can last anywhere from a few months for a lesser correction to a year or more after a bear market turn. 

Eventually, the stock market does recover.  

Where are we now?

Right now, the U.S. markets are being yanked by record low oil prices resulting from the shale boom and high production from foreign drilling, as well as a growth recession in China.  We are caught in a tug of war between the Fed's gradual tightening (rise in interest rates) and China's quantitative easing.     

As a result of these economic influences, the market has experienced considerable volatility since last Fall.  Yet, despite global volatility, the U.S. economy is doing relatively well.

As of last week (17 Febr 16), we've seen corrections in the S&P 500 (down 15% since last summer); a 20% decline in the Russell 2000 (the index for small companies); and corrections in other markets.  

We may be getting close to the bottom, but we are not out of the woods, yet.

More good info to follow:

invest • wisely • and • carefully

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