The Dow Jones Industrial average made headlines this week by experiencing its biggest ever plunge, not once but twice. Forbes reported that the index fell in 8 of the last 10 sessions. The Dow dropped by 1,000 points twice this week. The first drop took place on Monday, when the index dropped by 1,175 points, making it the worst plunge in its history.
Then, on Thursday, the Dow plunged one more time by 1,033 points. This drop marked the official market correction; the market is now down by 10% from its previous high. This is the first time in 2 years that the market was in correction. The companies that got hit the hardest were Apple, Alphabet, Microsoft, Exxon Mobil as well as Berkshire Hathaway.
According to the news report, the S&P 500 has lost more than $2 trillion in market cap in the last week or so. The index dropped by 100.6 points, or 3.8% to 2,581. This is the lowest the index has been since November 2017. 490 companies on the S&P 500 index took a loss.
The Nasdaq Composite hasn’t fared much better, with the index dropping for 10 of the last 12 days. However, analysts are saying that it is simply a correction of the market and not a bear market.
According to Time, stocks started the tumble on Friday, when the Labor Department stated that workers’ wages went up quite fast for the month of January. While higher wages are good for the economy, it also means that corporate profits could get impacted. It is also an indication that inflation was rising. This is worrisome for investors as it could mean that the Federal Reserve would raise interest rates faster than desired.
If interest rates are increased, then it makes it more expensive for companies and individuals to borrow, which in turn impacts economic activity. This then causes the economic growth of a country to slow down.
According to the Washington Post, the 10-year Treasury went up to 2.9%, which is just 0.1% below the critical 3% mark. When treasuries start rising, it is an indication that investors are becoming risk averse and moving away from stocks to the relative safety of bonds. Some analysts believe that a 3% yield is to be expected. The Federal Reserve has had to cut down its US Bonds holdings and will start rescinding its easy-money policies.
Additionally, the Bank of England indicated that it was planning to tighten monetary policy earlier than was expected. This reinforced the fear that the easy-money policies that were put in place to combat recession are now coming to an end. Now, the challenge that central banks will have will be to control inflation.
The impact of the US stock markets nosediving were felt all the way to Asia. The Chinese stock market dropped by more than 5%. Hong Kong’s Hang Seng Index dropped by more than 3%, as did Japan’s Nikkei.
While a number of companies reported disappointing earnings, there were a lot of companies that performed quite well. Twitter’s stock price went up 12%, after it reported a profit for the first time. GrubHub stocks shot up by 27.4% after the online food delivery company announced a partnership with the parent company of KFC and Taco Bell, Yum Brands. Cardinal Health and Tyson Foods also beat market expectations. In fact, about 80% of the companies beat market expectations in their fourth quarter results.
According to Vox, this market correction was bound to happen; a bull market couldn’t last forever. This week’s debacle wiped out all of the Dow’s gains for the year. Vox’s Emily Stewart, people have seemed to have forgotten that this is how the stock market behaves. 2017 was an anomaly – it was a historically calm market.
Many analysts stressed that the market was still very strong. Chief Financial Analyst at Bankrate.com, Greg McBride stated that when a market suddenly declines, it is natural for people to wonder what happened. He also said that there is nothing wrong with the economy; if fact, the economy is performing better than it has in the last decade. This drop in the market was simply healthy and overdue volatility to reduce excesses.