IanFromSI
3 weeks ago
Just in case you’re five-year-old with no clue whatsoever. What stages of market might be in or going through, the following might be a great help to you.
The stages of a market downturn typically progress from a correction to a crash, and each stage has its own characteristics. Here’s a general outline of how this can unfold:
1. Market Correction (0-10% Decline)
• Definition: A market correction is typically defined as a decline of 10% or more from a recent market high.
• Characteristics:
• Investors begin to pull back from risk, often due to concerns over economic data, geopolitical events, or overvaluation in the market.
• The decline is often seen as a healthy and temporary adjustment.
• Sentiment shifts from optimism to caution.
• Corrections can last from days to months, and sometimes serve to set the market up for a recovery.
2. Bear Market (20%+ Decline)
• Definition: A bear market occurs when the market drops 20% or more from its recent peak.
• Characteristics:
• Investors become more pessimistic, and there is a significant drop in confidence.
• The decline is more sustained and widespread, affecting a broad array of asset classes.
• The economic outlook worsens, and corporate earnings begin to suffer.
• Investors start to sell more aggressively, leading to a prolonged downturn.
• Sentiment may shift to fear or even panic as asset prices continue to fall.
3. Market Crash (30%+ Decline in a Short Time)
• Definition: A market crash is a sudden, dramatic drop in stock prices, often 30% or more, within a very short period (days to weeks).
• Characteristics:
• Crashes are typically triggered by extreme events, such as financial crises, geopolitical shocks, or bubbles bursting.
• Market panic sets in, leading to mass sell-offs across the board.
• Volatility spikes, with wild price swings in a short time.
• Liquidity dries up as buyers disappear and selling intensifies.
• Investor sentiment turns to outright fear, with the focus shifting from return to capital preservation.
• Economic recessions often follow, as market crashes can lead to widespread financial distress and damage consumer and business confidence.
4. Capitulation and Recovery
• Capitulation: This is the stage where investors give up and sell en masse, often at the market bottom, leading to extreme overselling.
• Recovery: After capitulation, markets typically begin to stabilize as bargain hunters and long-term investors step in. Recovery can be slow, with the market gradually rebuilding confidence and starting to rise again.
Each stage reflects changes in investor psychology, from cautious optimism to fear,