The Dow Jones dropped 1,175 points on Monday — the largest single-day point drop in history —erasing all profits made so far this year.
The 4.6% decline is the biggest percentage loss the Dow has suffered since 2011, when we saw a drop of 1,089 points on 24 August.
Despite setting a record high for number of points dropped in a day, this is nowhere near the severity of the Global Financial Crisis. On Black Monday Dow plunged by a then-record of 508 points — 22%.
Why did the Dow Jones drop?
The plunge was a result of investors’ fear of Federal Banks increasing interest rates due to a strengthened economy.
If the economy continues to strengthen it could result in inflation, which has largely been missing since the GFC. This could mean heightened interest rates sooner rather than later.
While record low interest rates held, there has been much speculation about a bubble in the market as the Dow Jones has continued to climb, setting record highs. Many are saying that a pullback was inevitable.
Randy Frederick, vice president of trading derivatives for Charles Schwab, told ABC that he believes that the fall was ‘expected and healthy’,
‘When you’ve gone 18 months without a 5 percent pullback, so you would expect one,
‘It doesn’t mean the bull market is over; it simply takes away some of the froth and irrational exuberance from stocks and puts us back on a more sustainable trendline.
‘It’s time to sit back and wait because we might not have hit bottom.’
But some analysts are pointing the finger at the job market. Torsten Slok, chief international economist at Deutsche Bank, told Washington Post that,
‘The employment report on Friday showed wages are growing at the fastest rate since the recession…Investors are waking up to the fact that we won’t have low interest rates forever.’
Whether you believe this is a healthy correction or the start of a monumental crash, you can’t deny that this is a significant fall. And despite the talking heads trying to give off an air of calm, there’s an undeniable whiff of panic in the air.
It’s difficult for small retail investors to know which way to leap at times like these. Panicking and following the herd could be just as destructive to your wealth as doing nothing. Money Morning’s resident income-investing expert, Matt Hibbard, argues that with the right carefully chosen income-focussed investments, you can prepare for retirement without worrying about whether markets are headed up or down. Read the details in his free report, here.
For Money Morning