Saying "Biggest Point Drop in History" is a deliberate attention-grabber and incites more fear than it probably should. We should be more concerned with percentage changes and at -4.6% this doesn't even make the top 20 daily percentage drops, which cuts off at -6.98% for number 20 (see above link).
It looks like it might be in the top 100 though. Considering these are changes per day, and the chart covers around 100 years or 25,000 trading days, this puts it in the top 0.4% of largest percentage daily losses. So, it does appear to be a significant losing day if 99.6% of such days are smaller in magnitude.
But I think it clearly shows the standard of journalism we live with. This is a headline about numbers so we can easily debunk it by looking at the numbers, but almost every headline you read has been sensationalized in a similar fashion. This is the kind of reporting you expect from tabloids.
The only ones that matter are the ones that occur after roughly 1995. Most people weren't in mutual funds or stocks the way they are today. When the stock market dropped 50% in 2008/2009, so many people in retirement age were ruined because their retirement money was in the markets. A greater number of people's financial health is based on the stock market in 2018 than it ever did in the 1930s or 40s. In 1987, when the markets crashed 25%, it was interesting and scary, but if that happens today, millions of Americans need to push back their retirement by a dozen years. It's much more meaningful today because so many more people are affected by it.
One of the great feats of social engineering that Wall Street has done in the several decades is convincing regular people that they should have their money in the stock market. That lets them make billions of dollars "taking care of" their money without any personal risk themselves.
As an index bizarrely weighted by price per share and a somewhat arbitrary divisor, the DJIA isn't what you'd choose to report on in the first place if you cared about anything but sentiment.
You're silly if you just look at one day point/percentage drops. I'm not saying we're in for another recession, but many of the other events in the table you linked are actually part of a cluster of big drops, spread over several days. There was a ~600pt drop last Friday. It'll be fun to see what the rest of the week is like!
You have to take a look at percentage market moves. The markets have been moving up for a long time. A 1000 point drop when the market is at 26,000 is not the same as a 1000 point drop when the market is at 16,000.
Inflation finally is going up after years and we can get out of this stagnating economy. Wage growth up 3% in new January report and so we can finally expect interest rates to rise faster like they did in the past. Many investors, especially institutional ones have for years thought the stock market has been over priced but where else to park money because interest rates are too low?
Overall the 3% wage growth is huge for the economy especially because unemployment is so low. Other economic indicators also show a very healthy economy so when the next recession hits we'll have the tools to stop it. Inflation not rising has like stated baffled everyone so glad we are now dealing with what we know rather than wading into the unknown. The normal rules seem to apply again.
This is also why presidents shouldn't make their number one accomplishment the market because often times market crashes don't correlate with recessions or a poor economy. Trump did have a huge effect on the market, but not 10% which he thinks he did. That said the market is still higher than it was 5 weeks ago.
Risk averse savers will finally be rewarded. My biggest fear is the huge deficit, and the huge spending. I think the tax cut is great long term but could have been made significantly better, and could have scored under $100B deficit over 10 years under dynamic scoring (currently at 500B) if they decreased the top rate but still made it significantly higher than what it is today, and made the global min tax per individual countries but payable over time rather than all combined.
I wasn't a big fan of the tax cuts, even though I'll see the proceeds from them. Some think that the less you pay, the better, all the way to zero. In my view, taxes are like porridge, you don't want it too hot or too cold. The best amount is not too little or too much. I too worry about the deficit and think we need to tax the biggest gainers a bit more and provide safety nets for the economic losers so they can breath easy and participate in the economy a little more than just sustenance levels. As we've written and read about here in the past, it's expensive to to be poor (e.g. visiting the ER vs. early prevention, overdraft fees, etc). That may not be what you like to hear, but I also don't think we should tax the gainers too much either. There needs to be an incentive to to do well and I'd be against cutting into that too deeply.
> economic indicators also show a very healthy economy so when the next recession hits we'll have the tools to stop it.
Will the tools be there? You basically have monetary policy limited as interest rates are already low. And fiscal policy is limited as major tax cuts are already given and the debt/deficit mean increasing spend is difficult or come with potential negative consequences.
Am I missing something?
I'm more hopeful the govt uses this window to get itself in a position to manage the next downturn vs ride the good times and then not have the tools for the bad.
Trying to find a correlation between how the actual economy is doing and the current president is in my opinion a foolish endeavor. It takes way too long for a policy change to actually impact the economy and on top of that it's pretty much impossible to isolate the cause of the economic change. How the market reacts in the short term is even less relevant since it really only says how a certain group of people likes the change and isn't necessarily related at all to how the economy will nee impacted by the change.
Every time a president claims economic growth to be because of them they reveal themselves to either be a liar or a fool.
The wage growth would be nice, except actual wage growth isn't anywhere near 3%. That's the nominal figure.
For production and non-managerial positions, which is nearly the entire economy, inflation adjusted annual wage growth is under 1%. We'll need to see 4% or 5% nominal wage growth, with inflation holding at 2% or lower, to generate meaningful wage gains at the median.
"Many investors, especially institutional ones have for years thought the stock market has been over priced but where else to park money because interest rates are too low?"
What information are you basing this off of? I'm not doubting you, just curious as to where one could find that sort of sentiment of institutional investors?
Didn't the top income tax rate decrease by something like 2.5%? Doesn't seem like a lot of room for it to have decreased but still be "significantly higher" than it ended up at.
I hate to be nitpicking about good news, but the S&P 500 is down less than 7% from it's peak, that's hardly a crash. Especially after gaining 26% over the previous year. And, after increasing over 90% the last 5 years.
Obviously, either way a decline in the stock market indexes is good news for almost everyone. I'm hoping for a real crash as I need to save lots more money, not just for my retirement but also for my kids college.
> Obviously, either way a decline in the stock market indexes is good news for almost everyone. I'm hoping for a real crash as I need to save lots more money, not just for my retirement but also for my kids college.
tldr;
* The Global Short Volatility trade now represents an estimated $2+ trillion in financial engineering strategies that simultaneously exert influence over, and are influenced by, stock market volatility
* Since 2009 Global Central Banks have pumped in $15 trillion in stimulus creating an imbalance in the investment demand for and supply of quality assets
* Last month Austria issued a 100-year bond with a coupon of only 2.1%(6) that will lose close to half its value if interest rates rise 1% or more.
* Amid this mania for investment, the stock market has begun self-cannibalizing... literally. Since 2009, US companies have spent a record $3.8 trillion on share buy-backs financed by historic levels of debt issuance.
* Every decline in markets is aggressively bought by the market itself, further lowing volatility.
* Volatility is now at multi-generational lows...
Volatility is now the only undervalued asset class in the world. Equity and fixed income volatility are now at the lowest levels in financial history.
I would not have worried too much of a Dow correction, but I feel like a trifecta of events are coming together that is a bit concerning. First, is the explosion of US government deficit which could potentially lead to austerity measures in the near future. Second is the threat of inflation and overheating. And third is the plunging savings rate of individuals. It almost appears that these three are moving to a confluence. Austerity + rise in interest rates + depleted savings could lead to a consumer spending crash in the near future.
part of my biggest sell indication was a visit to the site zerohedge. They are a very bearish - gold centric site. I like to visit sites like these to balance out the generally optimistic news one sees elsewhere. Recently, I have noticed that the site has lost their commenters - they are all making fun of the site and how it cost them so much money, missing out on all these gains. I realized that completely aside from things like inflation upticking, the fed removing some QE, market being incredibly highly valued - that if one of the largest bear sites around had actually lost their crowd, that even that rank and file thought it was stupid to doubt that the DOW would only go up...it might be time to think about taking a step back. At least until post-Brexit next year.
The specter of rising interest rates in the US (driven by higher inflation expectations) appears to be a factor.[a]
Fast-growing companies that are investing aggressively today and whose profits lie far in the future, in particular, are exposed to rising interest rates, due to the higher duration of such companies' cash flows.
Duration, for those here who don't know, is a measure of the sensitivity of present value to interest rates.[b] Duration rises with the amount of time an investor must wait for cash flows, and vice versa.
For example, the present value of $100 of cash flow in 10 years, if the 10-year rate is 2%, is equal to $100/(1.02^10) = $82; if the 10-year rate rises, say, from 2% to 3%, the present value declines to $100/(1.03^10) = $74, or a -10% decline. However, if the $100 in cash flow is in 30 years, and the 30-year rate rises from 2% to 3%, the present value declines from $100/(1.02^30) = $55 to $100/(1.03^30) = $41, or a -25% decline.
In this example, an increase in duration from 10 to 30 years caused the sensitivity of present value to a 1% rise in interest rates to change from a -10% decline to a -25% decline. The longer an investor has to wait for cash flows, the greater the sensitivity of present value to changes in interest rates.
The same ruthless logic applies to companies. The present value of companies whose profitability is in a distant future declines much faster when interest rates rise than the present value of companies certain to generate cash flows in the near future.
Until recently, due to historically low interest rates and no prospects for inflation, the stock market has been rewarding high-investment companies that are sacrificing current profits for growth.
If interest rates continue to rise (along with expected inflation), I'd expect this abruptly to change -- in which case, strap on your seat belts!
A market is like a forest and a market crash is like a forest fire. In order for the market to grow and be healthy in the long term, a purge every now and then is necessary.
The dollar has weakened over the past year, so knock off 1/4 point off any quarterly GDP numbers proposed, and knock 10 points off the 23% the 401(k) supposedly got in the past year, and consider any inflation comes with assymetric timing risk where wages always lag by a lot. And now in real terms the past year's stock increases look a lot more ordinary rather than remarkable. It's not like the stock market is going to ignore a weakening dollar, in particular when the Treasury Secretary publicly says it's a good thing as if it's an actual policy to have a weak dollar.
And working people have to feel the sting of inflation before they demand wage increases, they don't just automatically happen. Before that, interest rates going up might increase housing sales as people want to get "in" before the interest rates go up even more, and then housing will slowly taper off as inflation and interest rates take hold, and people get priced out of buying, since their wages will not keep up in the short term.
Inflation also helps pump up tax revenue, and monetize debts. So the numbers will look better, but in real terms they won't be better for a while until the markets fully correct for inflation and then things stabilize a bit.
Why would you think that? Massive swing effects are often caused or exacerbated by algorithms trading on momentum.
They do that because trading on momentum usually pays, and doing the hard work of fundamental value investing is difficult and also hard to scale.
Momentum trading is fine if only a few people are doing it, but if enough of the market transitions to having 'no opinion except following the crowd', then you get instability just like this. And many factors since 2010 have made flash crash-like events easier to cause, not harder.
Market crashes don't necessarily have to result in economic pain. But when they did, both in 2008 and 1929, it was because the rise in stock prices was financed by debt. I'm worried that that might be the case today in the form of leveraged buybacks and the like, but I can't find any statistics on how much of the current asset bubble was debt financed. I suppose we'll know soon enough.
[+] [-] longerthoughts|8 years ago|reply
Saying "Biggest Point Drop in History" is a deliberate attention-grabber and incites more fear than it probably should. We should be more concerned with percentage changes and at -4.6% this doesn't even make the top 20 daily percentage drops, which cuts off at -6.98% for number 20 (see above link).
[+] [-] starpilot|8 years ago|reply
[+] [-] dkhenry|8 years ago|reply
[+] [-] pfarnsworth|8 years ago|reply
One of the great feats of social engineering that Wall Street has done in the several decades is convincing regular people that they should have their money in the stock market. That lets them make billions of dollars "taking care of" their money without any personal risk themselves.
[+] [-] wrs|8 years ago|reply
[+] [-] craftyguy|8 years ago|reply
[+] [-] thansz|8 years ago|reply
You have to take a look at percentage market moves. The markets have been moving up for a long time. A 1000 point drop when the market is at 26,000 is not the same as a 1000 point drop when the market is at 16,000.
[+] [-] unknown|8 years ago|reply
[deleted]
[+] [-] propman|8 years ago|reply
Overall the 3% wage growth is huge for the economy especially because unemployment is so low. Other economic indicators also show a very healthy economy so when the next recession hits we'll have the tools to stop it. Inflation not rising has like stated baffled everyone so glad we are now dealing with what we know rather than wading into the unknown. The normal rules seem to apply again.
This is also why presidents shouldn't make their number one accomplishment the market because often times market crashes don't correlate with recessions or a poor economy. Trump did have a huge effect on the market, but not 10% which he thinks he did. That said the market is still higher than it was 5 weeks ago.
Risk averse savers will finally be rewarded. My biggest fear is the huge deficit, and the huge spending. I think the tax cut is great long term but could have been made significantly better, and could have scored under $100B deficit over 10 years under dynamic scoring (currently at 500B) if they decreased the top rate but still made it significantly higher than what it is today, and made the global min tax per individual countries but payable over time rather than all combined.
[+] [-] state_less|8 years ago|reply
[+] [-] Gustomaximus|8 years ago|reply
Will the tools be there? You basically have monetary policy limited as interest rates are already low. And fiscal policy is limited as major tax cuts are already given and the debt/deficit mean increasing spend is difficult or come with potential negative consequences.
Am I missing something?
I'm more hopeful the govt uses this window to get itself in a position to manage the next downturn vs ride the good times and then not have the tools for the bad.
[+] [-] ajmurmann|8 years ago|reply
Every time a president claims economic growth to be because of them they reveal themselves to either be a liar or a fool.
[+] [-] adventured|8 years ago|reply
For production and non-managerial positions, which is nearly the entire economy, inflation adjusted annual wage growth is under 1%. We'll need to see 4% or 5% nominal wage growth, with inflation holding at 2% or lower, to generate meaningful wage gains at the median.
[+] [-] MediumD|8 years ago|reply
What information are you basing this off of? I'm not doubting you, just curious as to where one could find that sort of sentiment of institutional investors?
[+] [-] purplezooey|8 years ago|reply
[+] [-] dcosson|8 years ago|reply
[+] [-] oculusthrift|8 years ago|reply
[+] [-] valuearb|8 years ago|reply
Obviously, either way a decline in the stock market indexes is good news for almost everyone. I'm hoping for a real crash as I need to save lots more money, not just for my retirement but also for my kids college.
[+] [-] JKCalhoun|8 years ago|reply
[+] [-] dvfjsdhgfv|8 years ago|reply
Could you elaborate?
[+] [-] t3po7re5|8 years ago|reply
[+] [-] branchless|8 years ago|reply
Most people won't benefit from the crash because they have no savings to buy the dip.
What we need is jobs that pay and land prices that are not gouging productivity increases.
[+] [-] quotha|8 years ago|reply
[+] [-] eanzenberg|8 years ago|reply
[deleted]
[+] [-] tardo99|8 years ago|reply
[+] [-] Matt_Mickiewicz|8 years ago|reply
https://static1.squarespace.com/static/5581f17ee4b01f59c2b15...
tldr; * The Global Short Volatility trade now represents an estimated $2+ trillion in financial engineering strategies that simultaneously exert influence over, and are influenced by, stock market volatility
* Since 2009 Global Central Banks have pumped in $15 trillion in stimulus creating an imbalance in the investment demand for and supply of quality assets
* Last month Austria issued a 100-year bond with a coupon of only 2.1%(6) that will lose close to half its value if interest rates rise 1% or more.
* Amid this mania for investment, the stock market has begun self-cannibalizing... literally. Since 2009, US companies have spent a record $3.8 trillion on share buy-backs financed by historic levels of debt issuance.
* Every decline in markets is aggressively bought by the market itself, further lowing volatility.
* Volatility is now at multi-generational lows... Volatility is now the only undervalued asset class in the world. Equity and fixed income volatility are now at the lowest levels in financial history.
[+] [-] quickthrower2|8 years ago|reply
[+] [-] fwdpropaganda|8 years ago|reply
[+] [-] petercooper|8 years ago|reply
[+] [-] dmode|8 years ago|reply
[+] [-] candiodari|8 years ago|reply
[+] [-] refurb|8 years ago|reply
[+] [-] rmrm|8 years ago|reply
[+] [-] cs702|8 years ago|reply
Fast-growing companies that are investing aggressively today and whose profits lie far in the future, in particular, are exposed to rising interest rates, due to the higher duration of such companies' cash flows.
Duration, for those here who don't know, is a measure of the sensitivity of present value to interest rates.[b] Duration rises with the amount of time an investor must wait for cash flows, and vice versa.
For example, the present value of $100 of cash flow in 10 years, if the 10-year rate is 2%, is equal to $100/(1.02^10) = $82; if the 10-year rate rises, say, from 2% to 3%, the present value declines to $100/(1.03^10) = $74, or a -10% decline. However, if the $100 in cash flow is in 30 years, and the 30-year rate rises from 2% to 3%, the present value declines from $100/(1.02^30) = $55 to $100/(1.03^30) = $41, or a -25% decline.
In this example, an increase in duration from 10 to 30 years caused the sensitivity of present value to a 1% rise in interest rates to change from a -10% decline to a -25% decline. The longer an investor has to wait for cash flows, the greater the sensitivity of present value to changes in interest rates.
The same ruthless logic applies to companies. The present value of companies whose profitability is in a distant future declines much faster when interest rates rise than the present value of companies certain to generate cash flows in the near future.
Until recently, due to historically low interest rates and no prospects for inflation, the stock market has been rewarding high-investment companies that are sacrificing current profits for growth.
If interest rates continue to rise (along with expected inflation), I'd expect this abruptly to change -- in which case, strap on your seat belts!
[a] https://www.ft.com/content/af1f8e4a-0a23-11e8-8eb7-42f857ea9...
[b] https://www.investopedia.com/terms/d/duration.asp
[+] [-] meri_dian|8 years ago|reply
[+] [-] PoachedSausage|8 years ago|reply
[+] [-] turc1656|8 years ago|reply
"When a forest grows too wild a purging fire is inevitable and natural"
[+] [-] arthurjj|8 years ago|reply
[+] [-] cmurf|8 years ago|reply
And working people have to feel the sting of inflation before they demand wage increases, they don't just automatically happen. Before that, interest rates going up might increase housing sales as people want to get "in" before the interest rates go up even more, and then housing will slowly taper off as inflation and interest rates take hold, and people get priced out of buying, since their wages will not keep up in the short term.
Inflation also helps pump up tax revenue, and monetize debts. So the numbers will look better, but in real terms they won't be better for a while until the markets fully correct for inflation and then things stabilize a bit.
[+] [-] patio11|8 years ago|reply
[+] [-] Avshalom|8 years ago|reply
[+] [-] mozumder|8 years ago|reply
[+] [-] smallnamespace|8 years ago|reply
Why would you think that? Massive swing effects are often caused or exacerbated by algorithms trading on momentum.
They do that because trading on momentum usually pays, and doing the hard work of fundamental value investing is difficult and also hard to scale.
Momentum trading is fine if only a few people are doing it, but if enough of the market transitions to having 'no opinion except following the crowd', then you get instability just like this. And many factors since 2010 have made flash crash-like events easier to cause, not harder.
[+] [-] StriverGuy|8 years ago|reply
[+] [-] myth_buster|8 years ago|reply
https://www.npr.org/sections/money/2017/01/04/508261371/epis...
[+] [-] CodeSheikh|8 years ago|reply
9/15/08 9/29/08 10/7/08 10/9/08 10/15/08 10/22/08 12/1/08 −4.42 −6.98 −5.11 −7.33 −7.87 −5.69 −7.70
8/4/11 8/8/11 8/10/11 −4.31 −5.55 −4.62
8/21/15 8/24/15 −3.12 −3.57
2/2/18 2/5/18 −2.54 −4.60
For 2018 to reach 2008 state, lets see if there are more significant (>-4%) drops in 2018 for us to start freaking out.
Again this by all means is not a financial model, it is something that I put together to tell myself "Keep Calm"
[+] [-] unknown|8 years ago|reply
[deleted]
[+] [-] fallingfrog|8 years ago|reply
[+] [-] syphilis2|8 years ago|reply
[+] [-] bhouston|8 years ago|reply