Stocks and Dollars and Bears, Oh My!

Anything can happen in the stock market in the short term.  Expect both increases and declines.

A market correction is a reversal of the prevailing price movement trend for a security.  A “correction” is most often used to describe a decline after a period of rising prices. A market crash is commonly defined as a 20% decline in a single day or over several days.

On October 19, 1987—referred to as “Black Monday”—the DJIA plummeted 22.61% in a single session, the largest ever one-day percentage drop. On October 10, 2008, the DJIA closed at 8451.19—around a 22% cumulative loss over seven trading days.

Market crashes do not necessarily lead to bear markets. On October 13, 2008, the DJIA closed at 9387.61—the 936.42-point increase equated to an 11% single-day gain. Up to that point, it was the largest single-day gain in the history of the American stock market since the 1930s.  On October 15, 2008, the DJIA closed at 8577.91. The next day, the DJIA closed at 8979.26. Then on October 27, 2008, the DJIA closed at 8175.77. 

Testing the bottom is a term meaning the market fluctuates up and down until a low point is reached. 

A bear market is a period of decline in multiple broad market indexes, such as the Dow Jones Industrial Average (DJIA) and the Standard & Poor’s 500 Index (S&P 500), over several months—at least a two-month period.

Someone once said there are three phases to a bear market:

• Phase One—a few people see that things are getting worse.
• Phase Two—most people see that things are getting worse.
• Phase Three—everyone is convinced that things can only get worse. The third phase is when consumer confidence is at its lowest.  When consumer confidence is at its lowest, it is typically a good time to purchase securities.  

In good markets and bad markets, well-balanced diversified portfolios invested for the long-term are the key to financial success.

Over a long period of time, the DJIA trends upward. The Standard & Poor’s (S&P Index) odds of increasing over any one-year period are only seven to three.  The S&P odds of increasing over any five-year period are nine to one.

Stock market investment risks diminish over any five-year period. Money not needed within five years might be considered for stock market investments.

Sometimes people panic when the stock market drops and they lose a dollar. Anything can happen in the short term; however, over time the market has always rewarded long-term investors.

“For everything there is a season, and a time for every matter under heaven: … a time to break down, and a time to build up …” —Ecclesiastes 3:1-3 (RSV).