The stock market is heading south with unprecedented velocity amid coronavirus fears. Does that mean it’s crashing? Are we in a recession? Is this a financial crisis?
- No, no, and no.
How it works:
A stock-market crash happens when the market plunges suddenly, often for no particular reason.
- The stock market might be down 13% from its highs, but that decline took place over more than a week.
- Crashes can cause investors to lose a lot of money very quickly, but seldom have a big effect on the economy as a whole.
A recession is what happens when the broader economy stops growing and starts shrinking.
- The official designation of when a recession started and ended comes many months later from the National Bureau of Economic Research, a nonpartisan nonprofit.
A financial crisis will normally cause a recession. But while a recession takes place across the economy, a financial crisis is centered on the financial system, especially banks.
- In a financial crisis, fears of widespread defaults on bonds and loans spark worries that a country’s entire banking system might be insolvent.
- Unless the government steps in, often with a bank bailout, the economy can rapidly spiral into a full-fledged depression.
Where are we now? Stocks are down, but it’s a relatively orderly (if fast) decline, without a lot of panic selling. Financial analyst Josh Brown calls it “Panic Holding.“
- Because we’re more than 10% below the all-time highs, this is a “correction.”
- If we go down to 20% below the all-time highs, it will officially be a “bear market.”
- Context: The market is still about 30% higher than it was when Trump took office.
What about the Fed? The Fed’s job is to prevent a recession, and it should only care about the stock market insofar as it impacts the broader economy.
- On Friday, the Fed made the rare move of issuing a statement during trading hours saying it was “closely monitoring developments” on the coronavirus.
- “We will use our tools and act as appropriate to support the economy.”