Global Stock Panic Leads to Record Losses

Since the release of the jobs report, Wall Street has seen tremendous volatility amidst positive economic news for Main Street such as low unemployment, higher wages, and economic prosperity. Since the Great Recession, Wall Street has witnessed an economy with decent growth and peculiarly low inflation, and a strong market over the past year. The market's current reactions appear to speak to the market's expectation about the Fed's intention to raise interest rates and the potential for inflation.  

• Last Monday, the Dow Jones Industrial Average (DJIA) plunged some 1,600 points – the single greatest trading day point decline in history. Despite some buyback and damage reduction, the Dow was still down 1,175 points. The point decline equates to 4.6%, beating out the previous single day record decline during the 2011 European debt crisis. However, last Monday's percent decline did not come close to the 22.6% decline that occurred on Black Monday in 1987.

• The next day, the Japanese Nikkei and the Australian S&P/ASX fell 4.7% and 3% respectively. The Dow recovered its significant Monday losses. On Wednesday, the Dow and S&P experienced minor losses, ending slightly lower at the close of day. However, the Dow had another large drop on Thursday, declining 1,033 points, or 4.2%.

• Historically, the narrowing and flattening and then inversion of the bond yield curve during low interest rates has resulted in recessions. The yield curve normally compares the spread of maturity interest rates - typically the 2-year and 10-year bonds. While the yield curve narrowed for most of 2017, it has begun to steepen. The recent 0.4% jump (2.4% to 2.8%) in 10-year yields has increased the yield spread (bond prices move inversely from yields). The yield increase leads to lower bond prices, which, in turn, could potentially sway investors away from riskier stocks.

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Despite recent stock sell-offs and ensuing distress, the Dow continues to remain almost 40% higher since the presidential election. Strong corporate profits, economic growth, and tax cuts seem to have spurred the strong performance.  As noted in prior posts, the market is not the economy and the economy is not the market.