Why the Dow's Historic 1175-Point Plunge Isn't That Impressive

Why the Dow's Historic 1175-Point Plunge Isn't That Impressive

Why the Dow's Historic 1175-Point Plunge Isn't That Impressive

At the closing bell, the Dow was still down by 1,175 points, a drop of 4.6% that erased all of the gains made by USA markets so far this year. In percentage terms, Monday's fall only ranked 14 in the list of biggest falls in history.

Until recently, gains for stocks have come as the market has been relatively subdued, and any declines were met with buyers looking for bargains.

To keep that under control, America's central bank will need to raise interest rates, which has spooked investors who were expecting the US Federal Reserve to increase rates only two or three times this year. The Standard & Poor's 500 is now down almost 8 percent from its record high, set a little more than a week ago. However, selling resumed and the index finished 4.6 percent lower for the day. The S&P 500, a broader gauge of the market than the Dow, declined more than 4%.

"The rate worries have been the trigger" for the stock market's swoon, said Melda Mergen, deputy global head of equities at Columbia Threadneedle.

Many financial professionals say this sell-off is healthy for the market.

On Monday, the Dow Jones Industrial Average declined 4.6 percent to 24,345.75 points.

He said: "The bloodbath on Wall Street has washed away all the confidence in European markets".

The recent days of decline in share indices have come as a reaction of investors to changes in the outlook for the U.S. and global economy. But an hour into the session, the Dow rallied back within 1 point of its break-even point for the day. For example, in the 21 episodes since 1945 when the yield on the 30-year USA government bond saw a "significant" rise, the stock market rose 18 times, according to data from investment firm TrendMacro.

The losses in the market since the beginning of last week wiped out about a quarter of that gain. The S&P 500 would have to drop 7 percent or more to trigger a halt in trading, and it would have to drop 10 percent or more to be considered a "correction".

"Admittedly the Bank of England could go some way to allaying investors' fears of rising interest rates on Thursday, if (governor) Mark Carney issues a more dovish statement than forecast".

"In the middle of last month, optimism, bullishness and complacency was at an all-time high". The markets are above all fearful of a resurgence of wages militancy in the working class in the USA and internationally, the signs of which are growing. In all these years, we've had four official corrections, so not many, but we have also had 60 "panic attacks", as Yardeni likes to call them.

Market analysts have always been saying the market was overdue for a cooling-down period. The market downturn isn't being driven by bad economic news. "And I think volatility is likely to be higher in 2018 than it was in 2017".

Also on Monday, the Nasdaq Composite declined 3.8 percent to 6,967.53. In early trading Monday, the yield ticked up as high as 2.88%, before retreating to 2.86%. That is, their earnings do not cover their interest payments, and a sudden rise in rates would send them into bankruptcy, so dependent have they become on the continuous supply of ultra-cheap money.

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