The Dow’s Tumultuous New Year Leaves Analysts Guessing

From Christmas to New Year, the Dow couldn’t stop making headlines. Crashing and rising at record levels, the stock market’s losses and gains are likely to be setting the scene for a tumultuous new year. Yet much of the rising and falling likely had to do with investor reactivity; it remains to be seen how the economic situation will impact stocks.

2018’s Christmas was a record breaker for all the wrong reasons. The DJIA dropped 2.9% during Christmas alone, breaking the previous record in 1918. Similarly, the Nasdaq dropped 2.2%. Understandably, this led to concerns regarding the upcoming year, and many investors speculated that it was the beginning of a 2019 crash.

For many who have been following the market for a while, however, the Christmas surprise wasn’t a surprise at all.

Trouble Looming Ahead

A crash has been anticipated for many months. Analysts have identified many of historical markers of a crash — the stock market has been increasingly volatile, and there is both a trade war and recession looming on the horizon. For many analysts, it’s only a matter of time before a major crash occurs. Federal rate increases have also been blamed as spurning on the crash, as it’s considered to be bad news for businesses.

When the economy is unstable, the federal government often artificially decreases interest rates to encourage additional spending and investments. Unfortunately, this also means that the interest rates will eventually need to go back up. Timing these interest rate increases is extremely important, with the implication being that the federal government must believe that these interest rate increases are inevitable and that they are best timed now.

Some of the Christmas losses were quickly recovered by the 26th, with a 1,000-point gain that was the most significant single day gain since 2009. While this didn’t erase all of the losses, it was a positive sign to many investors, indicating that the losses the Dow experienced may have been significantly driven by emotion and sentiment. Further, the Dow often bounces back after the holiday season due to positive performances by retailers.

Despite those increases, the stock market still remained a little depressed; the retail sector alone couldn’t mitigate falling oil and gas prices, in addition to concerns regarding international trade and interest rate hikes.

The Market Remains Volatile

The stock market remained volatile even after Christmas, rising and falling 400 points in a single day following the New Year. And though the market did end higher than it started, the rising volatility has only increased concerns. A substantial portion of this new volatility had to do with reports regarding manufacturing in China. Chinese manufacturing is likely to be far more expensive in the coming year, and this is going to impact the profitability of quite a few companies, notably including tech companies such as Apple.

While some investors believe that the federal government may pause their rate hikes or even decrease them, others believe that another two or three rate hikes may be coming in 2019. Rate hikes are generally used to prevent individuals and businesses from acquiring too much debt. Too much debt can stagnate the economy and lead to an unstable economy.

Moving Into 2019

Higher interest rates are a sign of a better economy. When the economy is stable, interest rates are increased in order to preserve that stability. Despite the performance of the stock market, the fundamentals of the economy have remained mostly strong. It’s possible that any stock market volatility is being driven primarily by sentiment.

The largest concerns regarding the economy are speculative; investors are not yet sure how trade wars or energy costs will impact the overall market. Further, while investors have become concerned about the oil and gas market, a tightening of the global supply of oil and gas may boost oil prices moving into 2019. However, this does mean that investors have to be cautious regarding future investments.

While Christmas and the New Year were unexpectedly volatile for the stock market, it wasn’t altogether unexpected. For months now, analysts have believed that a crash was going to happen, and that we may be moving into a recession. The recent stock market performance may be a sign that this is about to occur — or it may simply have to do with predictions for the future. However, it may also be a positive for investors looking to purchase stocks cheap to hold.


Ethan Warrick
Wealth Authority

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