Due to the Russia – Ukraine conflict, the United States and various European countries have imposed trade restrictions against Russia. In March 2022, the United States barred the importation of seafood, Vodka, and certain diamonds from Russia. Other European countries imposed higher tariffs on Russian goods and restrictions were placed on Russia’s access to credit facilities from Multilateral institutions like the World Bank and the International Monetary Fund (IMF). These trade restrictions led to a decline in the Russian Ruble’s value in the first quarter of the year and have had an adverse effect on the Russian economy and also the Global economy. If these restrictions are lifted, there will probably be a rapid change in the nominal prices of commodities. This is known as a market correction.
So, what is Market correction? This article aims to explain the concept of a market correction and its impact on everyday consumers and Investors. Let’s dive right in!
Forbes advisor defines market correction as a sustained decline in the value of a market index or the price of an asset. A correction is viewed to be a 10% to 20% fall in the value of an index or an individual asset following a recent peak. A correction can occur in the price of an individual stock or bond or an index that measures a group of assets. A fall in the price of an individual asset of more than 20% is regarded as a bear market and this usually lasts for a longer period.
When a major economic event occurs in a society, investors tend to pause, take a step back and consider the impact of the event on the global economy. The market correction is an indication of a potential reset in the price of the commodity. An example of a potential market correction can be seen in the UK Housing market. The demand for properties rose in the UK after the pandemic restrictions were lifted, this led to a general increase in the prices of properties. Currently, the prices of properties in the UK are at their highest level since the 2008 global financial crisis. However, the rise in house prices has slowed in recent months which could lead to a market correction between 10% and 20%.
Market corrections are usually short-term, lasting between a few weeks and a few months. However, it can be challenging for investors as a 10% to 20% drop in the values of assets could adversely affect an investment portfolio. Corrections can also have a positive impact on both the market and investors as it tends to recalibrate asset valuation that may have become very high.
There are a few things investors should do during a market correction, the first is to understand what is causing the correction. This is important as investors may need to adjust aspects of their financial plans. It is also important that the investor build an investment portfolio that fits their risk profile. It is also important that investors re-evaluate their risk profile every year to ensure that it aligns with current economic situations. Lastly, it is important that as an investor, you have sufficient cash reserves to take advantage of short or long-term dips during a market correction.
We hope that we have been able to provide some clarity on what market corrections are and how they affect investors. Do have a great week ahead.
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Chen, J. (2022, February 17). Correction. Investopedia. Retrieved August 8, 2022, from https://www.investopedia.com/terms/c/correction.asp
Jones, C. (2022, August 3). UK house prices: history says the market is in for a long slowdown not a crash. The Conversation. Retrieved August 8, 2022, from https://theconversation.com/uk-house-prices-history-says-the-market-is-in-for-a-long-slowdown-not-a-crash-186072
Marquit, M. (2022, July 28). What Is A Market Correction? Forbes Advisor. Retrieved August 8, 2022, from https://www.forbes.com/advisor/investing/what-is-market-correction/ Swanson, A. (2022, March 12). U.S. and Allies Will Strip Russia of Favored Trade Status. The New York Times. Retrieved August 8, 2022, from https://www.nytimes.com/2022/03/11/business/economy/russia-trade-status-us.html