Key Terms to Know During Market Volatility

As the effects of U.S. President Donald Trump’s tariffs ripple through markets – and retirement accounts – around the world, it’s hard not to feel a little overwhelmed. In these turbulent times, the language used to describe what’s happening seems to be shifting as quickly as the markets themselves.

Deciphering the jargon that dominates the news in the middle of a crisis isn’t easy, but may help you make financial decisions in an uncertain environment. Below is a list of 8 terms worth knowing and what they mean.

Circuit breaker

A circuit breaker is a regulatory measure used to temporarily halt trading if stocks on an index collectively fall below a certain value. The idea is to prevent panic selling by providing a cooling-off period for investors to reassess their options amid extraordinary declines. Circuit breakers were introduced after the stock market crash of Oct. 19, 1987 and have been triggered only a handful of times since. The last time a sudden selloff triggered a market-wide circuit breaker in North America was in March 2020 – at the start of the COVID-19 pandemic – when it occurred four separate times.

Three levels of circuit breakers have been put into place:

The VIX index

The Chicago Board Options Exchange Volatility Index, or VIX, gauges market expectations for volatility based on S&P 500 stock index option prices. It's sometimes called the "fear index." A low reading can indicate most investors don't expect much market volatility over the next 30 days, while a higher reading means investor anxiety may be on the rise. The VIX often rises when the S&P falls, making it a valuable source of insight into how much fear or stress other investors may be feeling in the current environment. While you can’t directly invest in the VIX, you can gain exposure to the index in other ways, such as through exchange-traded funds (ETFs).

Falling knife

“Falling knives” refers to stocks that are rapidly dropping in value. They are often used in the expressions “catching a falling knife” that means investing in a security that is quickly losing value and hoping it will rebound or “don’t catch a falling knife” which implies securities that are dropping in value and will likely continue to do so, even if they seem tempting to buy.

In contrast, “buy the dip” is a strategy where investors buy a security when its value is declining with the potential to make a profit when its value recovers. This strategy carries a similar risk of a potential loss if the decline is persistent.

Contagion

Financial contagion occurs when economic disruptions in one region or market quickly spread to other interconnected systems in a virus-like manner. Recent examples of contagion include the 2008 financial crisis – triggered by subprime mortgage defaults that sent shockwaves through global markets – and the COVID-19 pandemic, which caused a wave of cascading health and economic issues around the world.

Penguin tariffs

If you’ve been paying attention to the tariff talk, you’d know that President Trump imposed duties on almost every locale, including one only inhabited by penguins. Yes, you read that right – the Heard and McDonald Islands, an external Australian territory populated only by penguins and seals, was hit with a 10 per cent tariff on April 2. It’s unclear why this spot was targeted, but some thought perhaps people could use it as a loophole by sending products to the islands and then shipping them to other countries tariff free. One problem with that theory: penguins only know how to fish and waddle, not set up new supply chains.

Bear market

When financial markets experience a drop of at least 20 per cent from a recent high, they enter bear market territory. (A correction, another word that’s been used recently, is defined by the market falling at least 10 per cent from a recent high.) Bear markets are generally accompanied by a growing sense of investor pessimism amid a weakening economy. They can be triggered by a number of factors, including interest rate hikes, inflation or major geopolitical events, and can last weeks, months or even years. As bad as they sound, bear markets could potentially present enticing investment opportunities as the mass market selloff inevitably results in discounted prices on desirable assets. As more investors take note and begin buying again, the bear market comes to an end. Bull markets, the opposite of bear markets, occur when markets rise by 20 per cent or more, amid renewed investor optimism.

Anchoring bias

A form of cognitive bias, anchoring refers to our tendency to focus on a single, often arbitrary, piece of information when making important decisions. The source of the bias, or anchor, usually relates to the value of something we’re interested in; it’s also often the first piece of information we receive. Anchoring bias can be detrimental to our well-being, particularly if it causes us to cling to outdated or irrelevant information when making (or avoiding) important decisions. It also explains why some investors struggle to move on from an asset that experiences a significant drop in value. If a stock you purchased for $100 a share is now trading at $50, you might find it hard to sell because your mind is still hanging on to that higher price point as its true value. The best way to counter an anchoring bias is to be aware of what’s happening and update your early impressions with more research.

Protectionism

The U.S. has described its new tariff policy as a way to combat protectionist policies embraced by trading partners. Others see the tariffs as a sign the U.S. is ushering in its own protectionist age. Think of protectionism as a shield that limits another trading partner from competing in your market. If a government feels its local industries cannot compete with its trading partners, then to level the playing field, it could adopt policies, such as tariffs, to make importing goods from those partners more expensive. Of course, it’s not always about levelling the playing field. If an industry is important to a country – say defence or food production – governments may employ even higher protectionist measures to ensure the domestic industry remains the most attractive option to consumers.