The Dow is in free fall again and the blame, again, goes to the trade fight between the U.S. and China.
If you get rattled when the stock market behaves erratically and the Dow careens — up and down hundreds of points in a single day — brace yourself.
The era of calm markets and small price swings is over. The new normal on Wall Street is all about wild fluctuations, mammoth moves like the Dow Jones industrial average’s 1,000-point drops earlier this year, and rapid-fire price reversals that can shift the mood of the market from optimism to pessimism in a matter of minutes — and sometime seconds.
Three of the Dow’s biggest daily point drops in its 122-year history, including its 1,175-point record fall on Feb. 5, have occurred this year. And its wild ride Friday, when it plunged 767 points before ending the day down 572 points, illustrates a return to volatility.
There have already been 27 trading days in 2018 on which the Standard & Poor’s 500 stock index has closed up or down by more than 1%, compared to just eight days in all of last year, according to S&P Dow Jones Indices. If the current pace of 1% swings persists through year-end, it would put the large-company stock index on track for its most volatile year since the financial crisis.
The roller coaster that has investors on edge has been powered by a barrage of unsettling headlines: The war of words between the U.S. and China over tariffs. A series of market-moving tweets from President Trump. A troubling stream of news related to Facebook and its data privacy crisis. Setbacks in the self-driving car business. Ongoing worries about the threat from rising interest rates and inflation.
There’s a lot of uncertainty right now, and investors hate uncertainty.
The “market environment has changed,” and investors are reassessing the new risks, Michael Farr, president of Washington, D.C.-money management firm Farr, Miller & Washington, told clients in a report titled “The New Normal.”
“With all the uncertainty,” he wrote, “markets will react and they will have larger price moves.”
In an attempt to soothe investors’ frayed nerves, Wall Street pros insist last year’s quiet rally that pushed the Dow up 25% was the anomaly, and that the more violent price action early this year is more normal market behavior.
“Market turmoil is an innate element of being an investor,” says Jon Swaney, co-head of strategic asset allocation at New York Life Investment Management. “It feels raw at the moment and it is not entirely pleasant. But in the near term, investors have to accept the fact that their account balance will bounce around more than it did last year.”
But a bumpy ride, Swaney adds, doesn’t mean Main Street investors should abandon their long-term financial plans. Citing the 2008 financial crisis and the bursting of the tech bubble back in 2000, he says the market has seen much worse.
Investors should focus less on disruptive tweets from the president and potential harm to businesses that could occur if — and it’s a big if — a full-fledged trade war breaks out between the world’s two largest economies, he says. Instead, focus more on the positive economic trends that still remain in place.
In a sign of strength, corporate profits for the first quarter of 2018 are expected to be the strongest in seven years, with earnings of companies in the S&P 500 expected to grow 18.4%, according to earnings-tracker Thomson Reuters. The current 4.1% unemployment rate in the U.S. is the lowest in 17 years. And the nation’s economy grew 2.9% in the final quarter of 2017 after two previous quarters of 3% or better growth.
“The day to day market moves can be scary,” says Swaney. “But what’s happening in the economy and corporate earnings is what will ultimately drive stock prices.”
Hank Smith, co-chief investment officer at Haverford Trust in Radnor, Pa., reminds investors that a 500-point Dow selloff today doesn’t pack as devastating a punch as it did 30 years ago when the blue-chip stock index was at a much lower level. The Dow’s 572-point drop Friday totaled just 2.3%. And the 1,175-point dive in February didn’t even add up to a 5% drop. In contrast, on Black Monday in 1987 the Dow’s 508-point decline equated to a loss of 22.6% — its biggest one-day percentage decline in history.
“Now that was a big deal,” noted Smith. “Prior to this year, we haven’t seen volatility for so long that we’ve forgotten it’s normal.”
Smith says Wall Street doesn’t want tariffs or a trade war and expects the market to remain bumpy until there’s more clarity on how the U.S. conflict with China will play out.
Farr’s advice to investors in these turbulent times?
“Be sure of the risks you are assuming and that you are comfortable with those risks,” he advised. “Don’t let emotion, either euphoria or despair, lead you astray. The return of volatility doesn’t necessarily mean the bull market is over or that equities are bad investments.”
China warned on Friday it would fight back “at any cost” with fresh trade measures if the United States continues on its path of protectionism, hours after President Donald Trump threatened to slap an additional $100 billion in tariffs on Chinese goods.
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