Coronavirus Don’t Panic About The Stock Market

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.”

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• 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.”