The stock market has been a fickle beast lately with a lot of ups and downs. The downs, however, have more than a few people freaking out. Monday’s 1,175-point drop in the Dow Jones industrial average was the largest point drop in history.
Now the talking heads are telling us we’re in a stock market correction.
Great. But what does that mean?
What’s a Stock Market Correction?
A stock market correction is basically a dip of 10% or more in the stock market from recent highs.
On Jan. 26, 2018, the Dow hit an all-time high of 26,616. On Feb. 8, it closed at 23,860, officially making it a correction period. The Dow Jones industrial average, Nasdaq composite and S&P 500 have all fallen 10% this week.
If the market reaches a 20% decline for at least two months, then we have a bear market. While a correction can be a short-term blip on the market radar, a bear market has a longer-term impact. We’d like to avoid that.
What Causes a Correction?
Oddly enough, a stock market correction can be a sign of a healthy economy. As the economy surges, it is expected that inflation will follow. The federal government combats inflation by raising interest rates.
When interest rates go up, it’s harder to borrow money. It’s also harder for businesses to make money. That means people lose faith and begin selling stocks. When people sell stocks, the market drops.
Is This a Recession?
Nope. While a market correction can be a sign of an upcoming recession, it’s by no means a sure thing. In fact, the S&P 500 has hit correction levels 36 times since 1950 — that’s nearly one every two years.
While the market is always unpredictable, our healthy economy suggests this could be a short-lived event. Cross your fingers, just in case.
What Should You Do During This Market Correction?
Make a pitcher of margaritas, sit back and relax. If you’re worried about your long-term investments, you shouldn’t be. Try to keep it all in perspective. When President Barack Obama took office in 2009, the Dow Jones was at 7,949. Today, it’s approximately 200% higher.
Warren Buffett, who’s rumored to know a thing or two about investing, says tough times are great for investors. “During such scary periods, you should never forget two things: First, widespread fear is your friend as an investor, because it serves up bargain purchases. Second, personal fear is your enemy,” he wrote last year in a letter to Birkshire Hathaway investors.
Why is widespread fear your friend? Because when the nervous Nellies begin to sell, stock prices fall. It’s basically putting the stock market on sale. What do savvy shoppers do? They buy things when they go on sale. A dip in the stock market is an opportunity for those who want to get in or build on their portfolios.
If you’re not looking to buy like Warren Buffett, just chill out with that pitcher of margaritas like his faux cousin, Jimmy Buffett.
This article contains general information and explains options you may have, but it is not intended to be investment advice or a personal recommendation. We can’t personalize articles for our readers, so your situation may vary from the one discussed here. Please seek a licensed professional for tax advice, legal advice, financial planning advice or investment advice.
Tyler Omoth is a senior writer at The Penny Hoarder who loves soaking up the sun and finding creative ways to help others. He lives by the mantra “WWJBD” or “What Would Jimmy Buffett Do?” Catch him on Twitter at @Tyomoth.
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