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Circuit Breakers

EconWatch (May 4)

Looking Back..

Less than 2 months ago, U.S. stock markets closed the day after a multi-week plunge of nearly 30%, in an event unparalleled since 2012. Since then, the U.S. economy has been in free-fall, with more than 26 million people filing for unemployment, widespread bankruptcies, and a GDP growth rate of -4.8%.

So why did stock markets close in the first place?

The shutdown was a result of market circuit breakers, implemented by the NYSE in 1987, to reduce market volatility. They act as a damage control mechanism, automatically halting all trade if the market begins to plummet.

US circuit breakers have 3 thresholds:

Level 1: A 7% drop => trading halts for 15 min.

Level 2: A 13% drop => instantly halts market for 15 min.

Level 3: A drop of 20% or more => instantly closes markets for the entire day

So has it worked?

Following this unprecedented closing, markets were fortunately able to begin recovery. This trend seems to be persisting, as just this week, the S&P 500 increased by over 31% despite growth contractions worldwide.

This serves as a reminder that regardless of how poor an economic situation may be, a resilient market will nonetheless overcome.

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