09 Feb Another Day of Wild Market Swings: Should You Be Worried?
The Dow Jones Industrial Average dropped another 1,000 points on Thursday after a week of sharp dips and brief, sporadic rebounds. It’s the first pangs of market volatility we’ve seen in quite a while, after a 20%+ increase in global stock markets in 2017 and a nearly 50% rise in U.S. equities over the last two years. And even though we certainly didn’t predict this latest drop, our January investment newsletter reminded investors that “a run-of-the-mill 10% ‘correction’ can happen at any time.”
So should you worry about another wild market swing? Greg Ip at the Wall Street Journal addresses this question directly in a recent article.
First of all, while the media talks up the points lost, it’s important to keep the numbers in context:
The 2,271-point drop in the Dow Jones Industrial Average in the week through Monday, a decline of 9%, didn’t even meet the usual 10% threshold for a correction. Tuesday’s 567-point rebound didn’t make the top-500 daily increases by percentage. Wednesday’s 509-point swing between high and low was positively humdrum, with the Dow closing down 19 points, or 0.1%, at 24,893.
The simple mathematical fact is that the larger the Dow grows, the more points it must gain or lose to make a large percentage change. While that may seem obvious, it bears reminding that it would take a drop of 5,400 points to equal the market’s fall on that infamous “Black Monday” of 1987. But it certainly feels harsh to see such drastic moves all of the sudden, given the remarkable calm in the markets over the last few years. We also pointed this out in our latest newsletter, noting that by “year end, the S&P 500 Index had rallied for more than 400 days without registering as little as a 3% decline. This is the longest such streak in 90 years of market history, according to Ned Davis Research.”
But more importantly, the reason for the market’s latest moves revolve around inflation and interest rates going up, not down. That’s quite a perspective shift from the last nine years, where investors sold stocks when fears of deflation popped up … the exact opposite today.
An inflation scare is an entirely different animal from the deflation scares that have rocked markets in the past decade, including the U.S. financial crisis of 2008, Europe’s government-debt crisis of 2011 and China’s slowdown in 2015. Each of those events tanked, or threatened to tank, a key economy and push inflation into negative territory. In each, investors bet on more central-bank measures to prop up growth.
This time it isn’t slow growth, deflation, or more central-bank stimulus that preoccupies investors, but the opposite. Last Wednesday, the Federal Reserve released a statement in which it predicted “further” gradual interest-rate increases. The word “further,” which wasn’t in December’s statement, subtly signaled more conviction that higher rates are in order. Then Friday’s report on January job growth was accompanied by the largest annual increase in wages since 2009.
Reading between the lines, we see that the market is worried about inflation, which is one of the potential byproducts of a more robust economy. As we pointed out in January’s newsletter, the “broad driver of the market’s rise for the year was rebounding corporate earnings growth, which was supported by solid economic data [and] synchronized global growth.” If we continue to see synchronized growth around the world, it’s hard to imagine not having some inflationary pressures, but that’s far better than the opposite problem: the deflationary scares of several years ago.
In the end, whether these recent swings are just the beginning stages of more volatility to follow or simply a brief pause on the way to higher stock market records remains to be seen. In either case, we will follow our discipline and long-term perspective to navigate these markets prudently and take opportunities that present themselves.
Jon Houk, CFP®
Wealth Advisor, Portfolio Manager
Wealth Management, Investment Strategy
The above article is intended to provide generalized financial information; it does not give personalized tax, investment, legal or other professional advice. Before taking any action, you should always seek the assistance of a professional who knows your particular situation for advice on taxes, your investments, the law, or any other matters that affect you our your business.