The Stock Market Game Week in Review: Jan. 21-25

It was a bit of a roller-coaster ride on Wall Street last week.

Even before the New York Stock Exchange rang its opening bell on Tuesday, Jan. 22, the Federal Reserve announced an emergency interest rate cut by 0.75 percentage points to 3.5% -- the largest cut since 1990. Amid fears of a recession , the Fed took the unusual step of making a 75-basis-point cut outside of its regularly scheduled meeting. The Fed also lowered the discount rate it charges on direct loans to banks to 4%. The U.S. central bank said it made the move in light of a "weakening economic outlook and increasing downside risks to growth ."

The Dow (DJI) was down almost 465 points at its session low, while the Nasdaq (IXIC) dipped briefly into what is typically considered bear market territory, falling more than 20% from its 52-week closing high set in October 2007. The markets rebounded on Wednesday, Jan. 23 and Thursday, Jan. 24 with the Dow rising more than 100 points, bringing its two-day gain to more than 400. Despite the positive rally, many economists believe the rate cut was "too little, too late" to stave off a recession.

For your Stock Market Game students "recession" and "bear market" are most likely new concepts. What are they? Broadly defined, a recession is a downturn in a nation's economic activity. The consequences typically include increased unemployment, decreased consumer and business spending and declining stock prices. Recessions are typically shorter than the periods of economic expansion that they follow, but they can be quite severe even if brief.

The National Bureau of Economic Research, which tracks recessions, describes the low point of a recession as a trough between two peaks, the points at which a recession began and ended -- all three of which can be identified only in retrospect.

As for a bear market, it is sometimes described as a period of falling securities prices and sometimes, more specifically, as a market where prices have fallen 20% or more from the most recent high. A bear market in stocks is triggered when investors sell off shares, generally because they anticipate worsening economic conditions and falling corporate profits.

While many SMG students are still grasping the core economic concepts of the program, such as what is a stock or a company and how to determine proper ticker symbols, the "What the Fed Said" edition of "In the News" is an interesting read in light of last week's market activities. It discusses the January 2007 stock market rally after a Fed interest rate cut, but also discusses why investors pay such close attention to the Federal Reserve's words and actions. The issue is accessible in the Teacher Support Center under the "Publications" section.

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