By Mark DeCambre
As the stock market has convulsed lower and yields for bonds have surged in recent weeks, culminating in a so-called correction for the Nasdaq Composite Index, average Americans are wondering what’s amiss with Wall Street.
Increasingly, Google searches have been focused on the state of the market (and the economy), and for a good reason.
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The Dow Jones Industrial Average /zigman2/quotes/210598065/realtime DJIA +0.13% just posted its worst weekly loss since October 2020 and the S&P 500 /zigman2/quotes/210599714/realtime SPX +0.11% and Nasdaq Composite /zigman2/quotes/210598365/realtime COMP +0.16% logged their worst weekly percentage drops since March 20, 2020, according to Dow Jones Market Data shows.
Searches on Google featured the following popular queries: “Is the market crashing?” And “why is the market crashing?”
What is a market crash?
To be sure, the market isn’t crashing inasmuch as the term “crashing” is even a quantifiable market condition. Declines in stocks and other assets are sometimes described in hyperbolic terms that offer little real substance about the significance of the move.
There is no precise definition for a “crash” but it is usually described in terms of time, suddenness, and/or by severity.
Jay Hatfield, chief investment officer at Infrastructure Capital Management, on Saturday told MarketWatch that he might characterize a crash as a decline in an asset of at least 50%, which could happen swiftly or over a year, but acknowledged that the term is sometimes used too loosely to describe run-of-the-mill downturns. He saw bitcoin’s /zigman2/quotes/31322028/realtime BTCUSD -0.45% move as a crash , for example.
He said the overall equity market’s current slump didn’t meet his crash definition, in any regard, but did say stocks were in a fragile state.
“It’s not crashing but it is very weak,” Hatfield said.
What’s happening?
Equity benchmarks are being substantially recalibrated from lofty heights as the economy heads into a new monetary-policy regime in the battle against the pandemic and surging inflation. On top of that, doubts about parts of the economy, and events outside of the country, such as China-U.S. relations , the Russia-Ukraine conflict , and Middle East unrest , are also contributing to a bearish, or pessimistic tone, for investors.
The confluence of uncertainties has markets in or near a correction or headed for a bear market, which are terms that are used with more precision when talking about market declines.
The recent drop in stocks, of course, is nothing new but it may feel a bit unsettling for new investors, and, perhaps, even some veterans.
The Nasdaq Composite entered correction last Wednesday, ringing up a fall of at least 10% from its recent Nov. 19 peak, which meets the commonly used Wall Street definition for a correction. The Nasdaq Composite last entered correction March 8, 2021. On Friday , the Nasdaq Composite stood over 14% below its November peak and was inching toward a so-called bear market, usually described by market technicians as a decline of at least 20% from a recent peak.
Meanwhile, the blue-chip Dow industrials stood 6.89% beneath its Jan. 4 all-time high, or 3.11 percentage points from a correction, as of Friday’s close; while the S&P 500 was down 8.31% from its Jan. 3 record, putting it a mere 1.69 percentage points from entering a correction.
Worth noting also, the small-capitalization Russell 2000 index /zigman2/quotes/210598147/delayed RUT -0.80% was 18.6% from its recent peak, putting it 1.4 percentage points from a bear market.
Underpinning the shift in bullish sentiment is a three-pronged approach by the Federal Reserve toward tighter monetary policy: tapering market-supportive asset purchases, with an eye toward likely concluding those purchases by March; raising benchmark interest rates, which currently stand at a range between 0% and 0.25%, at least three times this year, based on market-based projections; and shrinking its nearly $9 trillion balance sheet, which has grown considerably as the central bank sought to serve as a backstop for markets during a swoon in March 2020 caused by the pandemic rocking the economy.
Taken together, the central-bank’s tactics to combat a burst of high inflation would remove hundreds of billions of dollars of liquidity from markets that have been awash in funds from the Fed and fiscal stimulus from the government during the coronavirus crisis.
Uncertainty about economic growth this year and the prospect of higher-interest-rates are compelling investors to reprice technology and high growth stocks, whose valuations are especially tied to the present value of their cash flows, as well as undermining speculative assets, including crypto such as bitcoin /zigman2/quotes/31322028/realtime BTCUSD -0.45% and Ethereum /zigman2/quotes/108573964/realtime ETHUSD -0.48% .
“Excessive Fed liquidity had the effect of inflating many asset classes, including meme stocks, unprofitable tech stocks, SPACs[special-purpose acquisition companies], and cryptocurrency,” Hatfield said.
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