The big news of the week was the major "correction" the stock market experienced on Tuesday. A nine-percent drop in the Shanghai stock index helped spark a global sell-off of stocks and increased concerns about a global slowdown in economic growth. The major US averages experienced some of the worst single-day point losses they've ever seen. The Dow Jones Industrial Average sank 416.02 points, or 3.29%, to 12,216.24, its worst single-day pullback since the market reopened six days after the terrorist attacks of Sept. 11, 2001. The Nasdaq sank 96.65 points, or 3.86%, to 2407.87, and the S&P 500 tumbled 50.33 points, or 3.47%, to 1399.04.
Sellers unloaded shares with conviction, and the New York Stock Exchange traded record volume. Roughly 3.89 billion shares changed hands and volume on the Nasdaq reached 2.80 billion shares. Around 3pm, the industrials, already down more than 200 points, dropped precipitously in a matter of minutes, due in part to what appears to have been a heavy backlog of sell orders that had temporarily clogged the system. At one point, the Dow slumped 546 points before rebounding slightly.
Most of the selling pressure was relieved yesterday after the Institute for Supply Management said its manufacturing index for February rose. Also a solid report on the factory sector helped a slight comeback. Shares of Edison International (NYSE: EIX) gained 1.41 percent, or 66 cents, to $47.58, a day after the utility company reported a stronger-than-expected profit. Policy-makers assured nervous investors on Friday that the US was not heading into recession and stock market losses did not warrant central bank intervention.
Investors took comfort from comments by Federal Reserve Chairman Ben Bernanke but still showed signs of unease about the economy. Former Fed Chairman Alan Greenspan also warned earlier this week that a US recession was possible, although not likely, in remarks that may have contributed to a worldwide downturn in stock markets since Tuesday.
What does this type of market news mean for your Stock Market Game teams? Most likely short-term losses. Therefore, it's important to emphasize to your students that business cycles are par for the course when it comes to investing. It's a good bet the US will experience another recession before your students retire. And that recession will be followed by a period of growth and so on and so forth.
Your students may be tempted to sell their positions when they see they have declined in value. The Buy, Sell, or Hold? lesson in the Teacher Support Center examines ways students can analyze basic financial data to determine whether they should buy, sell, or hold their positions. The lesson is accessible by clicking "Lesson Sequence" and then selecting "Display a Complete Outline of All Lessons."
This article was written by a staff member of The Stock Market Game.