Melina’s Memorandum: What to know about the stock market tumble

On Monday, Feb. 5, the U.S. stock market stumbled, causing the largest drop on record for the Dow Jones industrial average (Dow) and the Standard & Poor’s 500 stock index (S & P 500). The Dow fell more than 1,000 points, and the S & P 500 fell 113.19 points, which translated to a decrease of 4 percent and erased all the gains made in 2018. However, as stated by the “New York Times,” “There have been far blacker Mondays,” referencing the idea that the drops are relative, and the harsh drop should be analyzed regarding the market’s history.

The U.S. experienced another Black Monday in 1987, when the stock market lost the most significant percentage of its value ever recorded in a single day. The severity of the drop was worse despite the overall point drop being less. The Dow lot 22.6 percent of its value in a single day on Black Monday, which at that time equated to a reduction of only 508 points. In this instance, the Dow dropped a total of 1,175.21 points but lost only 4.6 percent of its value. Other significant single-day stock market drops in recent history include in the Great Recession of 2008, where the stock market lost 7.87 percent and 733.08 points.

When assessing drops in the stock market, it is important to look at the whole picture and understand it is all relative regarding the current economic situation. The Dow had been running at record-high levels, which contributed to the stock market having the largest overall point drop on Monday, but a relatively smaller percentage drop. The media often catastrophize events such as these and make the situation worse as people who do not look at the drop in relative terms begin to panic.

Potential reasons cited by news sources, such as CNN Money, were the appointment of the new Federal Reserve Chair, Jerome Powell, and the economic plans of the Trump administration, which would lead to inflation. Additionally, bond yields have been increasing, which encourages saving rather than investment. Overall, this equates to the uncertainty of investors of future economic conditions and instability in the stock market.

The most important takeaway from this drop is to be skeptical of headlines that catastrophize events. Seeing headlines that describe “largest drop” tends to emphasize a narrow view which an unwary reader can latch onto and make poor investments choices as a result.

Headlines that overstate the severity of the drop emphasize things such as the record levels of the growth of the Dow and how the drop reflected a smaller percentage change than other stock market stumbles in the past. In other words, the stock market dropped significantly, but it had also been growing significantly, for a substantial period at record point numbers. Consequently, a seemingly massive point drop is, in reality, less impactful than other smaller point drops in the past.

While it is important to be aware of the changing economic conditions, the drop in the stock market does not necessarily mean that the economy as a whole is headed for trouble as headlines can frame it to be. The stock market particularly is dependent upon expected future outcomes of a myriad of factors, so this decline is likely a part of the natural ebb and flow of the stock market. It must be looked at from a holistic view rather than a snapshot of current conditions.