Feb 29, 2020 - Economy & Business

Don't panic about the stock market

Illustration: Aïda Amer/Axios

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."

  • 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."

Go deeper

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Why it matters: The sell-off reflects serious fears that the oil price drop and the coronavirus could throw the economy into a recession.

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Federal Reserve chairman Jerome Powell took the rare move Friday of issuing a statement meant to reassure investors, one that opened the door to a possible interest rate cut.

Why it matters: The Fed rarely issues statements like this outside of policy meetings and scheduled public appearances. It came as the stock market continues its steep decline this week. Stocks briefly pared some losses after the 2:30 p.m. EST statement came out.

The world needs Trump to save it from a coronavirus-induced recession

The Fed has clearly gotten the message being sent from financial markets — "OMFG!!!" — and has acted accordingly.

The state of play: The U.S. central bank is responding to the coronavirus outbreak as if the country is in a crisis, first by declaring an emergency 50 basis point rate cut last week, and on Thursday by announcing $1.5 trillion in injections to the systemically important repo market, on top of already increased funding injections.