The stock market has been showing off all its moves lately, challenging headline writers to come up with colorful new ways to describe what’s going on.
But we don’t need creativity right now. We need calm and commonsense. Let’s start by defining and putting into perspective some of the terms being used. The difference between a stock market crash, correction, dip or end of days depends on the severity and duration of the market’s movements.
- A stock market crash is a sudden and sharp decline in stock prices in a short period of time. We’re talking about wide swaths of the market cratering more than 10% in a single day. (The U.S. stock market — using indexes like the S&P 500 or the Dow Jones Industrial Index as proxies — has experienced massive single-day drops about six times.)
- A stock market correction is a slow-motion crash that takes place over many days, weeks or even months. To qualify for “correction” status, the drop must be around 10% from the market’s previous 52-week high water mark. (FYI: We’ve been through nearly 40 corrections since 1950.)
- A dip or a pullback happens when a stock stumbles between 5% and 9.9% (just shy of that 10% “correction” marker) from its highest price. This can happen multiple times a day, especially with volatile individual stocks.
- A bear market is officially triggered when stocks close a trading day 20% lower than they were from the highest point recorded in the previous year. That happened on Wednesday when the World Health Organization declared the COVID-19 outbreak a “pandemic” and as the virus continued to cause economic disruptions. A bull market is a sustained period where stock prices are rising and are expected to continue going up.
- A recession refers to the broad economy, not just the stock market’s performance. When there are two or more consecutive quarters of negative growth in the Gross Domestic Product (GDP), a country is in a recession. The stock market’s movements can contribute to a recession, and vice-versa — a slowdown in economic growth (or a pandemic) can lead to stock market mayhem.
None of these scenarios are pleasant, but all of them are an inevitable part of our economic cycles. What’s also inevitable is that this current gut wrenching period will be followed by a full recovery and bull market rally. It’s been like this for every single market correction, dip, crash, bear market and recession.
How long is this going to last?
Good question. Past performance may not be a guarantee of future returns, but it sure helps put things into perspective.
If you had $100,000 in the S&P 500 before some of the market’s more recent major downturns, here’s how much you’d have as of the end of 2018 if you waited it out and stayed invested.
Clearly, it pays to stay the course. But that’s admittedly hard to do when you’re watching your nest egg start to rot away in a matter of days.
What makes right now seem particularly brutal is that we’ve grown accustomed to an historically long period of prosperity. We’ve had practically 11 years of sunshine since coming out of the worst recession the U.S. has seen in seven decades.
So, yeah, after catching a glimpse of my 401(k) balance the other day, I experienced a moment of what Charles Schwab investment strategist Liz Ann Sonders calls the “puke phase.”
I quickly closed that browser window to remind myself that the best thing to do right now is nothing. (Actually, the freaking out is fine. That’s human nature. The doing nothing is the key part.) That money is intended to remain invested for the long-term — I’m not touching it for at least another 10 years. My investments are diversified so that not everything zigs and zags in the same direction and severity. I’ll also continue my automatic monthly deposits into my retirement portfolio where, at the moment, I’m purchasing stocks on sale.
Going forward, the stock market will do what the stock market has always done — drive you nuts in the short term but reward you handsomely if you stick it out. It’s worth it. Just take a look at the returns on that table above in moments of doubt.
More on HerMoney:
- How to Handle Sudden Stock Market Moves
- Is there a Recession Coming? Here’s How to Manage
- The Federal Reserve Just Cut a Key Interest Rate: What Should You Do Now?