This week, the Dow Jones Industrial Average dropped in a way that it never had before. Monday, the benchmark fell 1,175 points, taking the greatest tumble in its long history. At one point, it was down 1,500 points during the trading day.1,2
While Monday’s Dow loss was indeed severe, it was not as catastrophic as certain headlines trumpeted.
The index fell 4.6%, which is today’s equivalent of a 652-point dive back in October 2007 when the Dow reached its pre-recession closing peak of 14,164.43. For some recent perspective, consider that the Dow took a 610-point dive the day after the United Kingdom voted for the Brexit in 2016 – and over the following 20 months, it ascended to record heights.1,2,3
The Dow actually witnessed an intraday correction Monday. At the bottom of the plunge late in the trading session, it was at 23,923.88, which was 10.1% beneath its last record close of 26,616.71 on January 26. It finished Monday’s trading day off 8.5% from that January peak.1,3
The S&P 500 finished Monday at 2,648.94, about 7% below its last record close of 2,872.87.1,2,4
Corrections happen. It has been so long since the last one (early 2016), many investors have forgotten the frequency with which they normally occur. Corrections can counteract irrational exuberance, and bring some rationality back into the market, which can be good for Wall Street’s collective health.2
Fundamental economic data is still strong: as an example, the Institute for Supply Management’s service sector purchasing manager index just came in at 59.9 for January, a 13-year high. Just one of many recent strong indicators.2
Pullbacks and corrections will always occur on Wall Street, and sometimes the bulls turn tail and run. It is part of the long-term story of the market. This Dow pullback was extraordinary in its four-digit depth, which was to be expected someday with the index above 26,000.This is a moment in stock market history – and thankfully, not the norm in that long history, as any glance at stock market cycles will reveal. At times like these it’s a good idea to avoid making hasty decisions, keep the long term in perspective, and realize that corrections are part and parcel of stock market investing.
Sincerely, Paul Serwinek
3 – cnbc.com/quotes/?symbol=.DJI [2/5/18]
4 – fedprimerate.com/s-and-p-500-index-history-chart.htm [2/5/18]