This week saw the Dow Jones’ largest single day drop in U.S. history, and unless you’ve studied economics or are well versed in the market, you may think that a boom or crash is just as natural as a volcano erupting or lying dormant; it just happens, and that’s the way it is. Analysts are still attempting to explain the causes; was it a possible bubble of worth that didn’t reflect on the reality of the market, or perhaps did it arise from fear of interest rates due to job growth?
The U.S. market dropped 666 points (for the socialists out there you’ll find gleeful satisfaction in the number of the beast), and a seven per cent drop in two days, having a significant impact on the Australian market, which fell nearly half as much with 3.2 per cent. Australian shares were reduced to their worst levels since September 2015 on Tuesday, with $56 billion wiped off the value of the stock market as investors worried over the possibility of interest rates increasing to even out the rising inflation.
SO WHY DID IT HAPPEN?
The Dow Jones industrial average had increased over 26% over the last year, a huge leap historically. On average the stock market has gained 8% in a year. It had gone for a record 312 days without a 5 percent decline; normally there are three every year. So, what did investors do? They may have begun to fear that the stocks they were buying weren’t actually worth what they were paying, and when or if the bubble burst it would eventuate in large losses. Additionally, jobs data indicated that interest rates may rise faster than the markets are expecting. It could be argued that the U.S. were sprinting in a marathon and, after the huge increase of stock value, there had to be a period of collapse and regathering of a normal pace of growth. Financial columnist Daryl Guppy appears to have predicted the fall recently, stating “one month ago I wrote that the Dow retracement was waiting to happen…I noted that the Dow was in bubble territory and primed for a substantial retreat.”
Ed Yardeni, a stock market analyst veteran, notes that the current bull market has been holding steady since 2009. Of course, in an environment like the stock market, steady is a relative term. In nearly a decade there have been only four corrections (a reduction of at least 10% in stock) in the U.S, yet 60 ‘panic attacks’ have occurred, which is where investors fear of a correction, but the situation doesn’t end up as bad as the doomsayers thought.
WHAT CAN WE TAKE FROM IT?
Australian financial journalist Alan Kohler believes that while the panic in the U.S. is being driven by the possibility of rising interest rates, there’s no notion of that in the ASX. “There hasn’t been a correction like this for a while but they do happen all the time, and can be expected,” he said.
“The fact that it’s the biggest points fall in history is irrelevant- there are a lot more points now, of course.”
Though the plunge caused palpitations in shareholders and businesses nationwide, it appears it was due for a period of steadying; if it didn’t, the fall would have been even greater and lead to less trust in the market. From a purely economic point of view, experts have been telling us this ‘correction’ is insignificant in the short term, and as market analysts are saying, the ASX is recovering already.
Photo 2 courtesy of BBC