Skip to main Content
Nation/World

4 takeaways from the big stock market selloff: Should you be worried?

  • Author: The New York Times
  • Updated: February 6
  • Published February 5

A trader reacts as he watches screens on the floor of the New York Stock Exchange in New York, U.S., February 5, 2018. REUTERS/Brendan McDermid

Stocks around the globe tumbled Monday, extending a sell-off that began last week. Investors, who had been riding a wave of optimism last year, have recently shown nervousness as global economic conditions have been shifting.

The S&P 500 had its biggest one-day drop in more than six years

— The Standard & Poor's 500-stock index fell more than 4 percent, erasing its gains for the year. The 4.1 percent drop was the worst for the S&P since August 2011.

— The Dow Jones industrial average fell more than 1,000 points, its biggest point drop ever. But that record is a function of the Dow's size, which is the largest it has ever been. In percentage terms, it fell 4.6 percent, something it also did in 2011.

— Bond yields have risen fast in recent weeks as people have moved money out of stocks into these traditional havens.

In a strange way, investors are nervous that the global economy is doing too well

The rise in stock prices during the last decade was fueled, in part, by some of the lowest global interest rates since World War II. Central banks around the world lowered rates and pushed down yields on safe government bonds, part of an effort to help economies limp their way out of the Great Recession.

The goal was to encourage investors to put their cash to work in the economy — for example, by buying corporate stocks and bonds. The theory is that the fresh flood of money would make it easier for companies to raise capital, invest in their businesses and hire workers.

That strategy, in many ways, paid off. For the first time since the financial crisis of 2008, the world's largest economies are growing in unison.

But what is good for the economy is not always good for the markets.

Central banks, led by the U.S. Federal Reserve, have started to remove some of the supports that helped supercharge stock prices during the past decade.

The Fed started raising rates two years ago. With rates going up, money is not as cheap. The robust jobs report last week fueled hopes that wage growth would follow. But higher wages could lead to higher inflation, creating new challenges for the Fed to manage, perhaps prompting it to raise rates more quickly.

Despite the drops, there have been far blacker Mondays

Measured by points, Monday's drop was the largest on record for the Dow and the S&P 500.

The previous biggest point declines for the two indexes occurred on Sept. 29, 2008, at the height of the financial crisis.

Weeks after Lehman Bros. failed in September 2008, lawmakers in the House of Representatives rejected a $700 billion economic rescue plan. The move sent markets tumbling.

But during the past three-plus decades, investors have endured a number of bigger percentage drops in the stock market.

The S&P fell 8.81 percent that day in 2008. That was more than twice as much as Monday's fall.

Keep one important idea in mind: Take the long view

The way we sometimes think — and the news media talks — about markets can make sell-offs like Monday's seem more dramatic than they are.

Our perceptions are distorted, in part, by thinking about swings in terms of points rather than in terms of percentages. The problem with that thinking is that our idea of big point moves was most likely shaped when the Dow was much smaller — and a drop in several hundred points would have made up a greater share of the average than it does today.

This recent decline has returned the market roughly to its level in mid-December, less than two months ago. That does not mean markets will not keep dropping, as they are wont to do. But it may not be time to sell.

Local news matters.

Support independent, local journalism in Alaska.

Comments