Tuesday February 06, 2018

A crash or a correction? What stock market turbulence means for your money

Trader Ronald Madarasz, right, works on the floor of the New York Stock Exchange, Feb. 6, 2018. The Dow Jones industrial average fell as much as 500 points in early trading, bringing the index down 10 per cent from the record high it reached on Jan. 26. The DJIA quickly recovered much of that loss.

Trader Ronald Madarasz, right, works on the floor of the New York Stock Exchange, Feb. 6, 2018. The Dow Jones industrial average fell as much as 500 points in early trading, bringing the index down 10 per cent from the record high it reached on Jan. 26. The DJIA quickly recovered much of that loss. (Richard Drew/Associated Press)

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Are the markets headed for a global crash, or is this just a much-needed correction?

Market watchers have had a turbulent few days, as a period of tremendous growth came to an abrupt end.

The benchmark Dow Jones industrial average lost 1,175 points on Monday, preceded by a 666-point fall on Friday.

The freefall prompted fears of an imminent crash, but Diane Francis, a financial columnist with Post Media and editor-at-large at the National Post, said there's nothing to worry about.

"It's not a panic situation, but it's a correction, it's a major correction," she said, from the excesses of the past year.

"2017 set 40 records throughout the year," she said, "It kept going up, up and up."

Growth was so high that it has now encouraged profit-taking: people taking advantage of the good time to sell.

'It's not a panic situation, but it's a correction, it's a major correction.' - Diane Francis

"I think behind the sell-off is a lot of people who said: 'Wow I've made a lot of money in the last year. I got something else to do with it, I'm going to buy a little summer home, or I'm going to take a big holiday, or I'm going to just put it aside in cash because I don't trust this.'"

Echoes of 2008

Not everyone is so confident.

For Michael Greenberger, there are echoes of the global crash 10 years ago.

Greenberger, who was a derivatives regulator under Bill Clinton, cited widespread defaults in both the auto-loan market and the student loan market in the U.S.

"Now those markets have been financialized the exact same way the mortgage markets were financialized in the run up to the 2008 meltdown," he told The Current's Anna Maria Tremonti.

Financial Markets Wall Street

Trader Peter Tuchman works on the floor of the New York Stock Exchange. Monday, he watched stocks plummet in the worst loss in six and a half years. (Richard Drew/Associated Press)

In 2006 and 2007, he explained, investors were placing bets on the fact that people wouldn't pay their mortgages.

They didn't own the mortgages. But like a casino they bet that the market would go down. So when a home failed in the United States, the default was magnified multiple times because big investors had made a decision to create what became known as "the big short," and to bet that the mortgages wouldn't be paid.

'I am not confident that Donald Trump's financial regulators are capable of doing the same thing.' - Michael Greenberger

There is $5 trillion dollars tied up in those markets; there was $9 trillion dollars tied up in the mortgage market in 2008.

Greenberger, who now teaches financial markets at the University of Maryland Francis King Carey School of Law, said he hopes that Francis is right and this is just a correction.

"But the belief that we are in a financial euphoria state and all will be well is not necessarily true," he said.

"The financial regulators we had in place in 2007 and 2008 — Bernanke and Paulson at the Treasury — they were able to cobble together a rescue," he said.

"I am not confident that Donald Trump's financial regulators are capable of doing the same thing."

'Take three deep breaths'

Diane McCurdy, the president of McCurdy Financial Planning, has advice for small investors who may be watching the markets in dismay.

"I think the most important thing is to look at yourself — don't look at what other people were doing," she told Tremonti.

'Do not sell now, because you're going to get hurt.' - Diane McCurdy

"You always have to re-balance your portfolio," she said, "So when you're going to re-balance now, is when the market goes back up."

"Do not sell now, because you're going to get hurt."

"All those people that are sitting on the sidelines wanting to buy the stock now… they're going to buy it cheaply because you sold it."

"So be really careful. Talk to your adviser and look at your own portfolio and get some good advice. Don't do the emotional thing."

Listen to the full interviews near the top of this page, where you can also share this article across email, Facebook, Twitter and other platforms.


This segment was produced by The Current's John Chipman and Julie Crysler.