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Contraction

Trading Term

A stock market contraction refers to a decline in the overall value of the stock market, typically marked by falling stock prices, reduced investor confidence, and lower trading volumes. This contraction can be part of a normal market cycle or a response to broader economic stress such as a recession, rising interest rates, inflation, or geopolitical instability.

During a contraction, market indices like the S&P 500, Dow Jones Industrial Average, or Nasdaq Composite may experience sustained declines, often by 10% or more from recent highs (a correction), and in deeper cases, 20% or more (a bear market). The contraction reflects investors’ anticipation of slower economic growth, lower corporate earnings, or worsening financial conditions.

Economically, a stock market contraction may both reflect and contribute to a downturn. As asset values fall, household wealth and consumer confidence often decline, leading to reduced spending and investment. While contractions can cause short-term volatility, they are also a natural part of market cycles and often precede periods of recovery and growth.

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