Australian investors were welcomed back from the long weekend to find the US in a ‘bear market’.
As a result, the ASX sank 3.84 per cent and more than $90 billion was wiped after the Wall Street crash overnight.
The was the worst day since March 27 and closed 12 per cent lower than this year’s peak, officially confirming it is in correction territory.
“There is a sea of red right across the board,” Ord Minnett senior private wealth adviser David Lane told ausbiz this morning.
“It has been very, very ugly.”
While a sea of red is never a good thing for investors, is this really something to fear?
Here’s everything you need to know.
What is a bear market?
A ‘bear market’ is defined as when an index, like the S&P 500 or the Dow Jones, falls 20 per cent from a recent high.
The S&P 500 was down 22 per cent last night from its peak on January 3 - officially confirming its status as a bear market.
Why did this happen?
For the most part, today’s drop off has been triggered by aggressive interest rate hikes in the US, which has sparked concerns about a global recession.
The US is also dealing with skyrocketing inflation - in fact, it is dealing with it on a much larger scale than we currently are.
US inflation hit a 40-year high of 8.6 per cent last week, causing the US Federal Reserve (the US central bank) to hike interest rates.
As we know from the Australian experience, higher interest rates are needed to curb inflation but also add to cost-of-living pressures.
Inflation is a tricky beast to tame, especially at a time when the world is still recovering from COVID-19 lockdowns.
Should I be concerned?
A market crash is not a good thing, but it is important to remember that the overall state of the economy is still quite healthy.
We have low unemployment, wages are rising (albeit slowly) and our GDP is still growing despite lockdowns.
The Australian share market often follows in the footsteps of the US, so it’s no surprise the ASX fell today.
In times like these, it’s important to remember your long-term plan and don’t make any rash decisions.