The Aftermath of the Market's Chaotic Week
If you haven’t been following (but I’m sure you have), last week was a crazy week for the global markets.
In fact, it was one of the worst weeks in two years.
Each of the major U.S. averages lost more than 5%. The Dow lost more than 1,000 points in one day... on two different days.
Last Monday was chaotic, to say the least. It was the largest point decline in the Dow’s history. The blue chip index lost 1,175 points.
The most baffling part of it all was that there wasn’t one obvious factor to pinpoint as the cause of this decline.
A week prior, on February 2nd, the January jobs report was released. It was better than expected. The report showed that there were more jobs added to the economy during the first month of 2018.
Not only were there more jobs added, but the wage growth was also coming in stronger than expected.
With such great news, why did the global markets see a downturn? After all, it’s usually bad news about the economy that tends to affect the market negatively, not the other way around.
Markets have been going strong, and with January’s jobs report, it started to seem like it all was too good to be true.
Markets started shifting, and the belief that the Federal Reserve would begin to raise interest rates in 2018 and beyond started to set in.
This shook up the market over that weekend and into the start of the week on Monday, February 5th.
VIX Index at 50!
Volatility was high.
The VIX index tracks current and expected market volatility. So it doesn’t come to a surprise that by the end of the day on Monday, February 5th, the index was at 50.
Let me put it into perspective for you...
In 2017, the VIX hit a record low of 8.64. For the VIX to hit 50 really demonstrates what kind of market volatility we’re dealing with.
A recent Survey of Consumer Finances from the Federal Reserve shows that 51.9% of U.S. families directly hold stocks, which includes those families that have 401(k) accounts and mutual funds.
High volatility obviously brings hesitation, even to the average person, regardless of whether they actively trade stocks or not.
James Poterba, president of the National Bureau of Economic Research and an economist at the Massachusetts Institute of Technology, had this to say:
While relatively few Americans actively trade stocks or take a direct hit in their income when the markets fall, a 10% drop can affect our attitudes about the economy.
It’s a psychological effect regardless of who you are and whether you’re investing. When the markets go down, there’s a feeling that the economy isn’t doing too well, either.
And that’s exactly what happened last week.
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The Market's Roller-Coaster Week
“The roller-coaster trading pattern of last week obviously caused investors to experience stress and uncertainty,” said Terry Sandven, chief equity strategist at U.S. Bank Wealth Management.
The stress and uncertainty led to some investors selling off.
Even 2017’s newest and hottest market, cryptocurrencies, was experiencing volatility, too.
Bitcoin was at a high of around $20,000 during December 2017. But by Tuesday, February 6th, it was dipping just below $6,000.
The cryptocurrency market cap fell to $300 billion from its peak cap of $830 billion.
As of the beginning of this week, Bitcoin is back up, coming in at $8,070.80 when the market opened up on Monday. Still not quite where it once was, but slowly approaching where it was in the beginning of 2018.
Recent news on a hearing with the Senate Banking Committee of how to begin regulating this young cryptocurrency market has had a significant impact on cryptocurrencies.
So this fall doesn’t come as a surprise. Especially with the decrease in global markets, investors are starting to stray away from riskier investments and go towards more “stable” investments.
Those kinds of investments typically are gold and silver.
The Market Bounces Back... For Now
The markets did bounce back last Friday — the Dow was up by 331 points. The VIX fell 7% on Monday after last week’s increase.
Also on Monday, the Dow added 410 points.
Global markets are still on the path of trying to stabilize after last week’s wild ride.
This has been one of the speediest stock market corrections ever, but that doesn’t necessarily mean we’re in the clear.
Investors and analysts alike are trying to make sense of what happened last week, wondering when or if we could experience something similar sooner than we’d like to.
Concerns over inflation are prevalent, with many wondering if it could lead the Federal Reserve to raise interest rates a lot quicker than originally planned.
Sam Stovall, chief investment strategist at CFRA, had this to say:
If it is [the bottom], then I wouldn’t be surprised if we have a deeper sell-off later in the year. I think it’s a tradeable bounce right now because we did test the 200-day moving average. When you think about it, fundamentally things haven’t really changed that much.
Bull markets tend to have a way of correcting themselves. They’re not entirely supported by fundamental growth like a company’s earnings; instead, they are supported by enthusiasm.
What’s important is that while yes, the market declined, it's on its way back to fundamental valuations — valuations supported by earnings.
Until next time,
Monica Savaglia is Wealth Daily’s IPO specialist. With passion and knowledge, she wants to open up the world of IPOs and their long-term potential to everyday investors. She does this through her newsletter IPO Authority, a one-stop resource for everything IPO. She also contributes regularly to the Wealth Daily e-letter. To learn more about Monica, click here.
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