Market correction: how to survive a stock roller coaster
On Monday, February 5 Dow Jones Industrial Average faced its biggest one-day drop falling by 1,175. The closest to it happened in 2008 when Dow decreased by 777 points. S&P 500 Index also had its worst day since 2011. In the same time, VIX (CBOE Volatility Index) jumped from 18 to 37 - the biggest increase in history. These events triggered a massive panicky sell-off all over the world. So, what exactly is going on with the stock market?
First of all, we definitely witnessed that stock market is not as stable as we used to think. The majority of leading stocks have been heavily affected by a sell-off, which was especially noticeable due to the calm 2017 and the beginning of 2018. In the first few days of January, stocks have been demonstrating a steady rise, with Netflix, Amazon and energy stocks in the lead. Despite all the advantages of stability, there is a serious drawback which comes along with it - you get lazy. After a year of relative peace, investors got used to the lack of unexpected losses.
One of the main reasons why stock market had to face this downfall is interest rates, which are expected to rise in the U.S. and U.K. The effect that interest rates decision has on the market is hard to miss: it has a ripple effect on the entire economy of the United States and an immediate one on the stock market.
Another reason which led to the current situation is the U.S. job report which showed a fast growth up to 2.9%.
Was it a crash?
There is only one answer to that question: no. The American economy is currently anywhere but at recession and markets worldwide are still far higher than they were just two months ago, shedding a huge value in a very short time. Moreover, a massive sell-off was actually ignited by the good news - raised wages and low unemployment rate in the U.S.
If you still keep wondering why we keep our attention focused on the U.S. economy, the answer is pretty simple - countries all over the world take their lead from the U.S. stock prices and until recently they have been counting on it staying low. Basically, it means that now central banks all over the world will have to start raising interest rates little by little without making the markets panic. The market's focus is currently on Bank of England, which according to the Reuters polls, can increase in May.
Is it a correction then?
According to Investopedia, a stock market correction is a reverse movement, usually negative, of at least 10% in a stock, bond, commodity or index to adjust for an overvaluation. The latest stock market correction occurred on February 8, 2018 as the DJIA and the S&P 500 fell more than 10% from their recent highs hit in late January, 2018. Corrections are generally temporary price declines interrupting an uptrend in the market or an asset. A correction has a shorter duration than a bear market or a recession, but it can be a precursor to either. A correction is very different from a crash since it measures the percentage decline from the most recent high. A crash is generally considered to be a 10% or more decline, irrespective of the most recent high.
Firstly, we have to remember that correction is a sign of a healthy market and economy, so there is no need for panic. The best approach for the market correction is to consider it as a long term buying opportunity (not relevant for binary options trading though). Right now, the worst seems to be over. Stocks closed out their fifth day of gains, with the S&P 500 just 4.9% away from its all-time high. Although, we can’t say that the market is going back to a comfortable low-volatility period, the necessary changes will lead to a stable and more volatile environment.