Explaining the Recent Drops in the Stock Market

Buy! Buy! Buy!

No, sell! Sell! Sell!

OK, that might not be an accurate depiction of the activity on Wall Street, but you don’t even need to be remotely familiar with the stock market to know that the Dow Jones Industrial has been in a state of flux recently.

On Monday, February 5, the Dow took its biggest single-day plunge in history, dropping 1,175 points and basically surrendering all of the gains that it made so far this year. The Friday before, February 2, the Dow dropped over 650 points. (For the sake of context, the second-biggest one-day plunge was 778 points coming amid the recession of 2008.)

In light of the stock market decline, there’s seemingly been a lot of confusion about why it occurred, what it means for the economy and who is to blame for it. Let’s take a closer look at some of the details:

Was it a Crash?

By most people’s accounts, no. Though historic in terms of points lost, the decline as a whole was only about 4.6 percent. That alone should give you an idea of how strong the Dow had been up until that point. In fact, Wall Street experts say that the percentage drop wasn’t even among the top 20 percentage drops in history, furthering their point that while the Dow drop was a plunge, it wasn’t a crash.

A better term to describe the recent stock market fluctuations should be “correction” — something that Wall Street analysts have been expecting for a while now, especially after the Dow gained about 25 percent last year. As of the time of this writing, the Dow is down about 8.5 percent on the year, and experts have said that a 10 percent correction is due. As investors should know, market corrections are a part of investing.

So, Why Did it Occur?

Before we get into some of the likely causes for it, it’s important to note that this wasn’t a plunge like other historic drops – and in a good way. In fact, experts agree that not one fundamental thing caused it, which is a positive. Instead, experts point to a variety of small things, including:

  • Concern about rising interest rates
    Inflation
    Selling sentiment
    Casting blame on the Federal Reserve
    The vulnerable condition of the market
  • What Does it Mean for the Economy?

    First of all, just because the stock market took a hit doesn’t mean that the economy is now suddenly in turmoil. In fact, stock market plunges don’t really have a relationship with recessions. A drop doesn’t mean one will subsequently occur, either immediately and in the near future. Heck, even the famed stock market crash of 1929 wasn’t solely responsible for the Great Recession, nor was “Black Monday” in 1987 when the Dow plunged amid strong economic growth.

    When it comes to the American economy, there are various other factors that experts weigh to determine its health. These include things like unemployment, which is currently at its lowest point in nearly two decades. Average hourly pay is another factor, and that’s at an eight-year high. Finally, things like consumer confidence and business confidence are also factors that weigh into economic strength, and both of these sentiments remain high.

    U.S. President Donald Trump touted the overall strength of the American economy Monday amid the Dow’s record plunge – and he’s correct not to correlate the stock market with the economy. Though the stock market took a dip, the overall U.S. economy did not, and that should be an underlying theme to keep in mind.

    Bottom line: Don’t dismiss the stock market fluctuation as just another day on Wall Street, but there’s no reason to think that doom and gloom is to follow.

    What’s Next?

    The good news is that after the Dow’s historic single-day plunge on February 5, things stabilized on February 6. In fact, on February 6, the Dow sunk another 567 points early, before ending the day with a gain of 567. On Wednesday, February 7, the Dow climbed 250 points, good for a more than 800 point gain in two days’ worth of time.

    Industry experts still think a correction is bound to occur, but they’re hesitant to say that a bear market is on the way. A bear market is one in which selling is more common, as stock prices increasingly fall.

    In other words, don’t freak out about the Dow’s big one-day drop. It doesn’t mean that everything is going awry with the U.S. economy or that another recession is imminent. In today’s world of hot take theater, it’s important to be in the know when it comes to these sorts of things.

    Regards,

    Ethan Warrick
    Editor
    Wealth Authority