You can make careful, informed financial decisions with the help of your financial advisor, but fluctuations in the financial market impact options, and it can be difficult to judge when it’s time to make changes or maintain the status quo. Brush up on market terminology, courtesy of Morningstar, and be prepared to review your choices with your financial professional so you can protect your nest egg now and for the future.
Market Correction
A market correction is a term that refers to a market decline less than 20% but greater than 10%. The 10% threshold is indicative of a significant decline. The term was born from a historical tendency for these price drops to “correct” the market by ultimately returning prices to their long-term trends.
- How long does a correction last? A market correction lasts from days to months or longer, though most are short-lived and, on average, last three to four months.
- Is market correction common? Stock market corrections are fairly common. Since 2000, there have been 10 corrections.
- Who struggles the most in a market correction? Short-term investors are often hurt by market corrections.
- Who thrives in a market correction? Potential buying opportunities are available for investors who have longer investing horizons during a market correction.
Bear Market
When a stock market decline occurs by 20% or more from its previous high, the correction enters bear-market territory. The entirety of the decline is considered part of the bear market.
- How long does a bear market last? Bear markets can last any length of time but tend to be longer than market corrections.
- How do you know a bear market is over? Wall Street considers the bear market at an end when the stock market closes at a new record high. This is when the bull market is declared.
- Can a bear market be predicted? No, the start and end of a bear market are only determined after they occur.
- Does every market correction lead to a bear market? Traditionally, no, and since 1975 only six of 27 market corrections have turned into a bear market.
Market Volatility
Terms like “bear market” are daunting, but the United States stock market has been on the rise for decades and delivers average annual returns around 11%. Though stocks are susceptible to market volatility from day to day, sometimes ending the trading day at a loss or considerable plunge, most financial market experts do not worry immediately.
- Sudden stock market declines can occur in one day of trading.
- It can take days or weeks to enter a market correction or bear market.
- Investor pessimism occurs in a weak or slowing economy amid concerns of economic slowdown.
Circuit Breakers
Market-wide circuit breakers are triggered by extreme declines in the market in a trading day, which is what occurred multiple times in early 2020 during the spread of coronavirus. The circuit breaks put an automatic, temporary stop to trading to calm panicking markets (sometimes 15 minutes or the remainder of the day) and force investors to pause amid the chaos so they can take time to gather information and reassess.
Get Financial Market Support During Market Volatility
Financial market definitions can be simple but difficult to identify in action. Rely on the expertise of your financial professional at Hollander Lone Maxbauer in Southfield, MI, to guide you through market volatility so you feel confident about your choices. Contact us to schedule a consultation.
