As the spread of the coronavirus continues to wreak havoc, stock markets around the world have continued their freefall. The Dow Jones, one of the world’s most trusted indices and a strong indicator of global economic conditions, fell by 10% on Thursday.
To put a 10% fall in perspective: that is the largest fall since the 1987 “Black Monday” market crash, and only marginally better than the great depression in 1929 where stocks fell by 14% and 12% across two days.
The huge fall, combined with earlier falls in the last few weeks has now led to us entering what is called a bear market. Those familiar with the stock market will know all about the bulls and the bears.
In stock market terms, a bull market is where the market is on the rise, stock prices are continuously rising and investors are feeling confident. Under these circumstances the economy is looking strong and employment levels are high.
A bear market on the other hand, and unfortunately where we now find ourselves, is quite the opposite. A bear market is one which is going through a period of continuous decline, with major stock indexes such as the Dow Jones dropping by more than 20% from a recent high point.
Whilst as economists we should be quick to point out that the stock market is not the economy, we can’t deny the fact that a weak stock market does give a strong indication of general economic performance. It shows us that business confidence is at a low, and as this seeps down into other parts of the economy, a bear market has historically been associated with high levels of unemployment and recession.
THINK LIKE AN ECONOMIST!
Q1. Explain the difference between a bull market and a bear market.
Q2. Explain why a stock market crash indicates low business confidence.
Q3. Analyse the reasons why a recession is usually associated with high levels of unemployment.
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