One-Day Point Drop: Reaction Commentary

Norm Boone / Feb 6, 2018 / Market Commentary

The market had the largest one-day point drop ever on Monday, February 05, 2018.


The markets are now down. Oh, wait, the markets have recovered. Are they recovered? Should you be worried?

We don’t think so.

Economic recovery can make many investors become complacent. They forget what a recession feels like. Large stock indices have risen, sometimes minimally and sometimes considerably, every year since 2009. The S&P Dow Jones Indices reported that 2017 was the first year ever that the S&P 500 Index had risen for every month of the year (the Dow dropped in March and small stocks fell during four months of 2017, but the S&P rose without fail, a first based on data going back to 1928). It continued to rise in January of this year. In all, for 15 straight months, the large US stock index rose, led mostly by communications and technology companies. According to JP Morgan, the market hasn’t fallen more than 12% since 2011. Investing became “easy,” and shortsighted people forgot that the price of higher returns is higher risk.

Monday's markets, via Yahoo Finance:

2.5.17 US Markets (Yahoo Finance).png

In a complacent, supportive environment, when markets go down, the drop feels bigger and more significant than it really is.

For perspective: Monday’s point drop, although large in size and the Dow’s biggest one-day point drop ever, was only 4.61%, probably not even in the top 50 of big market drops in history. In 1987, the Dow fell 22.61%, but only 508 points. In 1929, the Dow fell 12.82% (38.33 points). The third largest drop in history was in 1899, when the Dow fell 7.94 points, representing a fall of 11.99%.


markets are cyclical by nature

The point I’d make here is that the market is an auction, guided by numbers—results and opportunities. Pretty much wherever you look, good economic news continues, in this country and around the world.

We are in one of those rare times when economies all around the world are growing. This doesn't mean we won't have turbulence, or growing pains.

The recent reduction in American corporate taxes and regulatory restrictions are very likely going to support growing profits. More people are working, wages are rising and inflation is still low. If you put on your rational hat, this is and continues to be a very positive environment for stocks.

As the San Francisco Federal Reserve noted recently, the expansion is proceeding at a good pace, unemployment is low, and inflation is finally headed in the right direction. The data show no signs of an economy going into overdrive. So, from our perspective, when stock prices go down, they are only adjusting to past excesses and to reflect today’s worries about the change in who chairs the US Federal Reserve Bank or how prices might rise to reflect the pressure to move prices higher. It is our strong belief that the markets will quickly find a resting place to allow them to continue to move forward.

As recent Mosaic speaker and Chief Global Investment Strategist for Schwab, Jeffrey Kleintop, commented to Reuters about the point drop:

“I certainly don’t see anything fundamental. It wasn’t driven by any macro event, rather it appears to be computer driven trading that led to an order imbalance. These things can happen quickly and tend to be corrected quickly.”

Eventually, stocks will take a real and steady tumble. They always have, and are likely to continue to do so, every once in a while. For that reason, we build our portfolios to be exceptionally well diversified. They get much of the upside when things are good, and we expect them to moderate the degree of any big plunge.


this year

We expect the markets to grow this year, reflecting all of the positive economic elements going on in this country and around the world. At some point, they will turn around for a while.

We are prepared for both directions.

Think long-term and stay diversified. One-day events shouldn’t be of concern. Remain optimistic about the markets and the future.


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Topics: Market Commentary