Dow Drops 832 Points In One Day – Has A Correction Begun?

| October 12, 2018

stock marketThe stock market experienced one of the worst days of the year on Wednesday. The Dow Jones Industrial Average fell 832 points, more than 3%, the biggest lost since 8 months ago on February 8th. The S&P 500 dropped 3.3% to 2785.68. But the biggest losing major index was the Nasdaq Composite, which tumbled 4.1% to 7422.05, its biggest single day decrease since June 2016. The losses were widespread. Companies that have been the biggest winners on Wall St. for most of the year suffered the steepest declines. Technology stocks such as Apple and Amazon, the two most valuable companies in the S&P 500, each had their worst day in the last two and a half years. Together, the FAANG companies — Facebook, Amazon, Apple, Netflix, and Google — lost a collective $172 billion in value. It seems to be that larger companies were hit the hardest. The Russell 2000 index of smaller-company stocks shed 46 points, or 2.9 percent, which is relatively less impactful.

Usually when the market tumbles so dramatically we can pinpoint a reason or two. The main culprits this time are the fear of higher interest rates and the overhang from the U.S. trade dispute with China. Increasing interest rates too fast quickly can push investors to sell stocks and buy bonds instead. Although the yield on the 10-year Treasury declined toward the end of the day, its jump from 3.05 per cent early last week to more than 3.20 per cent yesterday has spooked investors. The yield was just 2.82 per cent in last August, and it’s now at a seven year high. Despite this the market expects the Federal Reserve to continue raising interest rates over the next few quarters. President Trump reiterated those concerns telling reporters after landing in Erie, Pennsylvania, for a campaign rally that he believes the Fed “is making a mistake” with its campaign of rate increases. “I think the Fed has gone crazy,” he said. At the same time, Trump called Wednesday’s market plunge “a correction we’ve been waiting for for a long time.” Being in a trade war with China also doesn’t help the market since many technology companies in the U.S. have overseas revenue.

Despite a setback to the stock market in Wednesday’s trading, it’s important for investors to put things into perspective. The S&P 500 is still up 9% over the past year even with the decline. And since early 2009, the S&P 500 has quadrupled in value thanks to higher corporate profits and low interest rate policies. The Fed can easily overshoot and cause the stock market to fall further if rates continue to climb. I think this is likely the case. Inflation in the U.S. is growing. CPI has climbed to 2.7% now compared to 2% a year ago. If this trend continues into next year then the Fed will have no choice but to tighten monetary policy even more so inflation doesn’t explode out of control. But what this does mean is that the stock market will continue to be negatively affected. The large stock market drop we saw Wednesday was just a knee jerk reaction and not likely to continue into a full blown correction right away. It appears to be oversold because there was not enough news during that day to substantiate a huge decline. We may see a small bounce back in the weeks to come. But due to the high chances of interest rates continuing to climb, we will probably see a real correction some time in December of this year or the beginning of next year.

Note: The author of this article is Kevin and it originally appeared at Modest Money.

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The author of this article is a contributor to Modest Money. (https://www.modestmoney.com/)

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