Recent volatility in the stock market has topped the news, and many words to describe what is happening and to predict where things are going — as if anyone can do that — are being thrown around. Before you run for cover or bury your head in the sand, knowing what these words mean might help.
Recession is probably the most familiar of the terms to millennials as many have had real-life experience with it, having lived through a recession. The most recent recession began at the end of 2007 and lasted, according the U.S. National Bureau of Economic Research (NBER), and ended in June 2009. The NBER is the official arbiter of recessions, and their official definition is “a period of falling economic activity spread across the economy, lasting more than a few months.” The NBER is a private nonprofit that studies and measures expansion and contractions in the economy. For the NBER, the major indication of a recession is the “real” Gross Domestic Product (GDP), which is everything put out by businesses and individuals without accounting for inflation. Although often referred to, changes in the stock market are not official indicators of a recession. Other economic indicators the NBER uses are employment statistics, retail sales and manufacturing data.
Officially, the definition of a market correction is a reverse movement in the stock market of at least 10 percent to adjust for an overvaluation. Although when people use the term “correction,” it often sounds like something worrying, among those in the know, for example, those who work in financial markets, a correction may be seen as a good thing due to that qualifier of an adjustment for “overvaluation.” This means the stock prices have gotten ahead of the actual value of a company’s value or potential earnings. A correction is often described as “necessary” to get stock prices in line with economic realities, and the same folks-in-the-know will often advise investors not to panic and sell investments after a market correction.
While a recession is an economic slowdown that lasts a little more than a year, a depression is defined as a sustained downturn in economic activity in one or more segments of the economy. Again, a depression is not measured by stock market activity but by low employment, a lack of consumer spending, low rates of manufacturing production as well as low levels of investment activity. The last depression was the one in 1929, and by most accounts, it lasted until 1933. A depression is by far the most depressing of the economic cycles we have been discussing.
Bear Market, Bull Market and Stock Market Crash
Here are some additional terms that get tossed around in conjunction with economic cycles. A bear market occurs when stock prices drop 20 percent or more from their 52-week high as measured by the Dow Jones Industrial Average, the S&P 500, and the NASDAQ. A bull market is a sustained period in which stock prices rise, usually for many months or even years. Sometimes, a bull market is given a numerical definition of a market rise of at least 20 percent. A bull market can only be identified in retrospect since analysts have to look back to calculate whether prices rose 20 percent or not. A bull market usually reflects a strong economy, including low unemployment, high GDP and high consumer confidence. A stock market crash is a sudden decline in stock prices, for example when prices of stocks in a large sector or the market, fall at least 10 percent over the course of one or two days. Crashes sometimes follow catastrophic news or the bursting of an economic bubble. Often, they initially mean great losses of wealth on paper rather than in reality, but they can signal the beginning of steep economic downturns.
Like life itself, the economy and the stock market ebb and flow through good times and bad. To avoid a depression of your own, it helps to understand the meaning of these terms that are used to describe the economic ebb and flow.
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