Q: What's the difference between recessions, corrections, and stock market crashes?
These three terms are often incorrectly used interchangeably, but in fact, they have different meanings.
A recession is an economic term that refers to a general slowdown in economic activity, generally defined as two consecutive quarters of negative GDP growth. While the effects of a recession often cause the stock market to fall, the term itself doesn't refer to a specific type of market activity.
A correction refers to a fall in the overall stock market, a specific index, or an individual stock, generally of at least 10%. Market corrections are common events, historically occurring about once per year, with the most recent example in early 2016. Market corrections are generally short-term dips, and are not to be confused with a bear market, which is a longer-term period of falling stock prices and general market pessimism.
Finally, a stock market crash is a sudden drop of stock prices, either throughout the entire stock market, or in a specific sector. The Crash of 1929, which was followed by the Great Depression, is the most well-known example, with the market plunging by 23% over a two-day period and eventually losing 89% of its value before bottoming out. Other examples are Black Monday in 1987, when the Dow Jones Industrial Average lost 22.6% in one day, and the crash of 2008, in which the market dropped 21% in a week.
The bottom line is that recessions, corrections, and bear markets are all normal and healthy economic occurrences, while stock market crashes are unusual events, often driven by panic.
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