Let's not panic about the Dow just yet

Marco Green
February 6, 2018

US stocks plunged on Monday, marking a second day of trading that generated steep declines, amid fears of rising inflation and potential rate increases by the Federal Reserve. That came during a 15-minute stretch where the 30-stock index lost 700 points and then gained them back.

At 12:34 p.m. ET (1734 GMT), the Dow Jones Industrial Average was down 230.59 points, or 0.9 percent, at 25,290.37, the S&P 500 was down 19.93 points, or 0.72 percent, at 2,742.20. USA economic growth was running at a 2.6 annualized rate in the fourth quarter last year and the unemployment rate is at a 17-year low of 4.1 percent. That was the average's sixth-worst drop ever, and it sparked all sorts of apocalyptic headlines and made investors nervous that an all-out stock market crash could be imminent. That's good news for workers but creates nervousness among equity investors concerned that the rise will stoke inflation. Higher borrowing costs could eat into corporate profits, while also slowing down the market for houses, cars and other items bought using credit.

The bloodbath is likely to continue across Asian markets today as panic sentiment is spreading globally over the weekend.

It is enough to spike the blood pressure, especially if you sat and watched the TV or ticker-tape and saw the wild swings down between 700 and 1,500 points.

Wells Fargo dropped 9.2 percent Monday after the Fed hit the bank with new penalties over a scandal that involved opening millions of phony consumer accounts.

After all, equities are valued on their ability to deliver an excess return over the risk free rate and investors will demand a greater margin of safety (lower share prices) in achieving those returns as risk free rates rise.

Take a look at the chart below, which reveals the 10 biggest point declines for the Dow, along with their percentage moves.

Other indices also declined.

Declining issues outnumbered advancing ones on the NYSE by a 8.64-to-1 ratio; on Nasdaq, a 6.92-to-1 ratio favored decliners. The Standard & Poor's 500 index fell 97.92, or 3.55%, to 2,664.21, with the energy sector leading losses that included nine of 10 major industry groups.

ENERGY: Oil futures extended losses. Amazon, whose stock has soared in the past year, declined 2.8 percent.

The long period of time since the last scary market event makes the current drop, which market pros had been warning about, seem worse than it is.

"That is not to say that we won't see further falls in coming days, but in an environment where growth is good and earnings are expected to rise globally, there are decent underpinnings", said James Knightley, chief global economist at ING.

"Corrections are a normal part of the investing process and not a reason to sell quality investments", said Alan Skrainka, chief investment officer at Cornerstone Wealth Management in Des Peres, Missouri.

Friday's USA payrolls report showed wages growing at their fastest pace in more than eight years, fueling concerns that both inflation and interest rates would rise faster than expected.

"This just serves to reinforce our expectation that a March rate hike is coming, and that the three-per-year pace that we have in our forecast right now is probably the starting point".

Other reports by Click Lancashire

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