After the President Vladimir V. Putin Russia has ordered troops to move into two separatist-controlled areas of Ukraine, and the S&P 500 index, which often serves as a proxy for the US stock market, has also crossed a notable threshold.
At market close on Tuesday, the S&P 500 fell to 4,304.76, down 1.01% on the day. That’s not much of a loss. However, that incremental drop nonetheless represents a notable milestone. It has sent the stock market down 10.3% from its most recent peak on January 3.
In Wall Street terms, that means the S&P 500 has had a “correction,” as its losses since January 3 have exceeded 10%.
That 10 percent definition is completely arbitrary and the subject of many fallacies, but the point is clear: Correction is not a good thing.
“It’s an early warning indicator that tells you the market isn’t going the way you want it to,” says Edward Yardeni, an independent Wall Street economist who has compiled detailed records of modern stock market history. “A 10% drop in itself isn’t too bad, but if the market keeps going down, the next thing you know, you’re down 20% and by general agreement you’re in a bear market, and, maybe, worry about a recession”.
What makes the market decline so worrisome is that an escalating geopolitical conflict in Eastern Europe is now being added. The stock market has many woes.
Stocks have been falling for weeks, for a variety of reasons. Concerned about the prospect of interest rate increase and generally tighter monetary policy from the Federal Reserve is at the top of my personal list.
The Fed, perhaps belatedly, planned at its meeting on March 15-16 to begin raising the benchmark fund rate from its current near-zero levels and then begin cutting $8.9 trillion. Accounting balance sheet. All that is aimed at mitigating inflation is happening at an annual rate is 7.5 percent, the highest level in 40 years.
In addition, death, illness, and inconvenience caused by the coronavirus pandemic have had countless devastating effects. The workforce in the United States is smaller than it is otherwise, and the service sector of the economy has yet to fully recover. The pandemic has also caused supply chain bottlenecks has stifled sales and production, and raised prices for important products such as cars and kitchen appliances.
Many publicly traded companies are overcoming these problems and passing the associated costs on to consumers, but their ability to continue to do so, while generating profits at the same time, drives the stock market. , is a questionable matter.
The Russia-Ukraine crisis threatens to make matters worse for the economy and markets. Russia produces important commodities, such as palladium, needed for the catalytic converters of gasoline-powered cars, and their prices have contributed to high inflation in the United States.
Anticipation of commodity supply disruptions has boosted prices in the futures markets, particularly for oil and natural gas, all of which could move much higher if the Ukraine crisis intensifies and if Western sanctions begin bite.
For those who remember the 1970s and early 1980s, the era of skyrocketing inflation and many recessions Caused in part by geopolitical shifts and two oil shocks, the possibility of a parallel occurrence in the 2020s is extremely worrisome.
The reality is that Russia is a nuclear power taking aggressive actions against an independent NATO-backed country. The possibility that conflict could be the start of a new Cold War, or something worse, cannot be completely ruled out.
That said, for investors, it’s worth remembering that since the stock market bottomed in March 2020, the S&P 500 is up 114.4 percent through January 3. astonishingly, the market decline since then has been insignificant.
Furthermore, although almost all those who closely watch the stock market agree that it has had a correction, there is no agreement on when it will happen. Laszlo Birinyiwho began analyzing the market with Salomon Brothers in 1976, says corrections occur whenever the market crosses the 10% border, whether it is late in the trading day or in the middle of the day.
That’s why Birinyi, head of his own independent stock market research firm, Birinyi Associates, in Westport, Conn., said a market correction occurred on Jan. not on Tuesday. The market at one point on January 24 was down as much as 12% from its close on January 3 before a smart recovery. “The sentiment of the market, the mood, has changed,” Mr. Birinyi said. “People were panicking until then – and then they weren’t.”
The market has been flat since then, and is now down a bit more. In purely financial terms, the drop in itself shouldn’t be a big deal, he estimates.
Birinyi focuses on picking individual stocks, not based on market averages, and says he doesn’t let little things like market corrections influence his strategy.
“We don’t focus on 10 percent gains when the market is going up,” he said. “We are not going to sell stocks just because there is a 10% gain. And it doesn’t really matter if there is a 10% drop. “
For his part, Mr. Yardeni said he also sees January 24 as a psychologically important moment. It represents “speculation in the market” – the point at which many investors simply give up and sell their shares, allowing market dynamics to change as bargain-seekers begin buying shares. promissory note.
Mr. Yardeni called waves like these “panic attacks” and said that January 24 was the end of the 73rd attack since the start of a long bull market in 2009. Russia’s hostility and Tuesday’s stock market plunge perhaps represent the 74th strike. “There is no science here,” he said. “It’s completely subjective.”
It’s easy for investors to panic, he said, but they’ll get better, most of the time, if they keep going. “I don’t think we’re in a bear market, that’s really what I’m saying,” he added.
For market labels like this, I can’t believe it. Are we in a bull market, bear market, correction or panic attack? I can not tell.
I just know that the geopolitics of the Ukraine crisis worries me in a way that no simple market decline can.
It doesn’t pay to panic. But this week, I worry.
https://www.nytimes.com/2022/02/23/business/stock-market-correction.html Russia-Ukraine crisis troubles stock market