Dow Jones Industrial Average: A Stock Market Crash or Correction?

Filed in Uncategorized by on August 8, 2011 0 Comments

The plunge of the Dow Jones Industrial Average in the last 10 days has created a global sell-off and panic. Did the S&P downgrade fuel a correction or crash in securities?

As President Barack Obama scrambles to reassure the nation and its partners the economy is chugging right along, market analysts and pundits fear the worst is yet to come.

Tell that to traders on Wall Street that there’s nothing to panic about, and you’ll probably get a menacing deer in the headlight look.

Volunteers of America Soup Kitchen WDCTell that to China that is fed up with America living beyond its means. And tell that to investors who are seeing their nest egg dry up right before their eyes.

But while the Dow Jones Industrial Average heads south from Standard and Poor’s downgrade of the country’s credit rating, a hot debate is underway that tries to sort out the dilemma of correction versus crash.

For starters, it’s worth sharing a valuable history lesson in the financial markets. Recall the Great Depression—the dreaded Black Tuesday when soup lines defined the era?

During that dismal time in American history, long before the word “global economy” took root, things all around were in shambles, and only the strong survived through the wild West ride.

The 1,147 point drop (about 9.3%) of the Dow Industrial Average is almost insurmountable at a glance. But the skies are not falling, the financial markets are not in turmoil, and there is no threat of soup lines returning any time soon.

Was it a crash? Absolutely not! But that depends on who you ask and what side of the aisle you’re on.

By definition, a “crash” is an abrupt drop in the market by 23% or more—in one day. That was the Great Depression, not the recent free fall after the S&P downgrade of the country’s credit rating.

So, the other question is: was it a correction? This is a plausible argument that has a bit of traction—again depending on who you pose the question to. Bear in mind that a “correction” is usually based on a recession. This just in: The country is not in what is classically called a correction.

Perhaps the markets are falling as a result of the partisan politics of Washington. At play is the typical finger-pointing and toying with the nest eggs of millions of Americans. But that is a debate beyond this snap shot.

Weigh in. Is the Dow Jones Industrial Average a sign of the worst to come, or is it just a cooling off of a hot market? Good luck with that.

Photo: Wikimedia Commons [file photo]

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