With the stock market at the forefront of the news, it’s an ideal time to review financial terms to understand what’s going on.
See the list below for a refresher on trade lingo:
- BULL vs BEAR MARKET. When the stock market is rising, it is called a bull market. Such activity signifies economic confidence with share values increasing and investments growing. A bear market signifies the opposite: stocks are falling. It can trigger panic and cause some people to sell their shares to avoid further losses; while such action initially relieves stress, though, it ultimately locks in losses and eliminates recovery and growth potential when the market inevitably returns.
- CORRECTION. This term has been thrown around constantly in the past few weeks to explain the market’s recent volatility. A correction refers to a 10% fall in stocks from a recent high. It’s a sign that investors consider the market overheated.
The stock market has been on a steady rise for several years with an historic upswing since President Trump’s election. The rise has been so dramatic, many insisted it was unsustainable. The last two weeks’ gyrations represent a correction that they argued was necessary. While the correction is stoking fear among investors, experts suggest that it does not necessarily indicate a coming bear market. In fact, many argue that quit the opposite is happening: the correction is attracting new investors who will ultimately contribute to steadier future growth.
- SELL-OFF, PULLBACKS, REVERSAL. When investors rapidly sell off their shares of stocks, bonds or commodities, it is called a sell-off. This may or may not indicate a coming bear market. Sometimes, it’s triggered by a company’s poor earnings report or an international crisis affecting oil prices. Minor sell-offs are called pullbacks. They are typically temporary, and the market recovers quickly. In fact, it signals a buying opportunity for new investors who in turn help trigger the recovery. A reversal, on the other hand, signals a more ominous trend. While a correction is generally deemed temporary, reversals point to a bear market.
- Interest rates. This number refers to the rate that banks charge to borrow money. They current stock market fluctuations have been triggered in part by fears that interest rates are rising and may trigger a bond bubble. That occurs when the value of existing bonds drops because newer bonds offer higher yields. A strong economy typically also triggers inflation, which results in higher interest rates. Banks raise rates to protect themselves from anticipated losses caused by inflation reducing the value of their future returns.
No one is certain what the outcome of the current fluctuations will be. While most experts agree that the current situation symbolizes a correction, they disagree with whether it indicates an impending bear market or is simply a temporary blip. Only time will tell.
At Silverman Financial, we understand that market instability creates concerns. We create financial portfolios based on your personal risk tolerance so that when market shifts, you remain protected and assured. We provide annual reviews to rebalance your risk regularly and to adjust to changes in your needs as well as in the markets. We are available at any time to answer questions to existing clients and to provide expert guidance to new clients.