Wall Street Sell-Off Sparked by Plunge in Chinese Stocks

The Dow Jones took a nosedive this morning, dropping more than 1,000 points when trading opened. The markets recovered some of their losses, but investors still appear rattled by disappointing economic news from China. We'll hear what to expect in the days to come and how it might affect your day-to-day life from three economic experts. 

Joining us are Edward Stuart, professor emeritus of economics at Northeastern Illinois University; Michael Miller, associate professor at DePaul University’s Driehaus College of Business; and Nancy Coutu, a principal of Money Managers, Ltd.

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As soon as trading began Monday morning, the Dow Jones lost more than a 1,000 points- the largest single drop it's ever seen. Global markets suffered as well. Investors appear concerned over the economic situation in China: Shanghai's main stock index fell 8.5 percent yesterday. So, are we headed into a period of decline? Or was this the natural correction many experts have been expecting?

Bull vs. bear markets

In a bull market, prices are rising or are expected to rise, according to Investopedia which is an education-minded website focusing on finances: “Bull markets are characterized by optimism, investor confidence and expectations that strong results will continue.” While the term most often refers to the stock market, it can be applied to anything that is traded, like bonds, currencies and commodities.

Bear markets occur when prices are falling and “widespread pessimism causes the negative sentiment to be self-sustaining,” according to Investopedia. “As investors anticipate losses in a bear market and selling continues, pessimism only grows.” 

Bull Market Bear Market
Supply and Demand for Securities Strong demand and weak supply Weak demand and strong supply
Investor Psychology Optimistic Pessimistic
Change in Economic Activity Associated with a strong economy as more people are willing to spend Associated with a weak economy due to less consumer spending

Bear market vs. correction

While both bear markets and corrections are typically devaluations, there are key differences between the two. 

A market correction is a “reverse movement, usually negative of at least 10 percent in a stock, bond, commodity or index to adjust for overvaluation.” Corrections are short-term trends that last less than two months.

A bear market lasts at least two months and includes a “downturn of 20 percent or more in multiple broad market indexes, such as the Dow Jones Industrial Average (DJIA) or Standard & Poor’s 500 Index (S&P 500).”

While corrections are short lived, they can be a precursor to a bear market or recession.

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