As Russia invades Ukraine and global markets waver, U.S. financial markets are flashing a key warning.
They’re in a correction.
So what exactly is that?
A correction is a 10% drop in stocks from their most recent high. And since peaking in early January, that’s exactly what the S&P 500 index, the broadest gauge of the U.S. stock market, has fallen into.
While there’s been “a fairly broad-based sell-off” in the financial markets since the beginning of this year, the S&P had been holding up well, said Ed Yardeni, president of Yardeni Research, a global investment firm. “But the developments in Ukraine are weighing significantly across the board,” he said.
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How did the stock market do today?
After four straight days of declines, the S&P 500 reversed course and ended 1.5% higher on Thursday after the U.S. imposed more sanctions on Russia. . .
Even though investors may have been anticipating it, the invasion of Ukraine by Russia this week is still “a shocker” Yardeni said as the U.S. now sees soaring gas and oil prices.
“But the shockwaves may not be over, we’ve certainly had corrections before but not this early related to a geopolitical crisis,” Yardeni said.
A 10% dip is an indicator that wary investors are more skeptical about the market going forward, Yardeni said.
What is a bear market?
Yardeni noted that most corrections end relatively quickly if the bad news turns out to be not as bad as expected. However, correction can also turn into a bear market, Yardeni said.
A bear market is defined as a drop of 20% or more from a prior closing high.
He noted that the previous bear market, at the start of the pandemic two years ago, was devastating, erasing over 30% in value from stocks in slightly more than a month.
But stocks regained their previous peak form nearly three months later, he added.
Will inflation go higher as Russia invades Ukraine?
Yardeni said the main focus of investors and economists this year has been the Federal Reserve’s likely plan to raise interest rates in order to rein in soaring inflation.
But, inflation may actually go higher, especially if supplies of food and energy are disrupted during the Russia-Ukraine conflict. Ukraine is a major exporter of wheat and Russia is a major exporter of oil, Yardeni said.
“The markets are clearly in the hands of Fed chair Jerome Powell and Russian President Vladimir Putin,” Yardeni said.
How often do corrections occur?
Every couple years, on average. Even during the historic, nearly 11-year-long bull run for U.S. stocks from March 2009 to February 2020, the S&P 500 stumbled to five corrections, according to CFRA. Worries about everything from interest rates to trade wars to a European debt crisis caused the pullbacks.
In 2020, a correction did worsen into a bear market after the global economy suddenly shut down because of the pandemic. That sent the S&P 500 on a breathtaking drop of nearly 34% in about a month.
This is the 24th time in the last 50 years that the S&P 500 has fallen at least 10%, including both bear markets and milder corrections.
Contributing: Associated Press
This article originally appeared on USA TODAY: Market correction: How will Russia invasion of Ukraine affect markets?
