DOW Drops Record 1,175 Points in a Single Day - Here's Why



The DOW dropped over 4% on Monday, losing 1175 total points; easily the record for the largest loss on points in a single trading day. Investors are selling currently with reports having come in about the improving job market and an increased return on government bonds, making stocks look less attractive.

After years of stagnant wages, American workers finally got a legitimate raise in January. Wages grew at the fastest pace since 2009; a strong signal of a healthy economy and a tight jobs market. Investors are seeing the improving job market as a sign that inflation may be increasing soon. Inflation has been surprisingly soft, which is pointing to a less stable labor market than the current unemployment rates would suggest. This is possibly due to a shift towards temporary or contract jobs, often with no health insurance, keeping wages depressed. It is also possibly due to dramatic changes in consumer habits, such as the growth in online retail and the collapse of brick and mortar retail.

Wall Street doesn't want average wages to rise too quickly because that will dent profitability. Corporate profit margins, a measure of efficiency, has climbed to record highs in part thanks to cheap labor costs.

Yields on government bonds have also increased recently with interest rates rising, making them look like a safe store of value. The 10-year Treasury yield has rocketed from about 2.4% at the start of the year to over 3% today. The Federal Reserve expects to increase interest rates several times over the next year, a sign that they are more confident in consumer purchasing power, making bonds look even more attractive.

The fear is that bonds, viewed as a boring but safe investment, will steal some of the thunder from stocks. That's because higher yields will make bonds suddenly look a bit more attractive.

There have been other signs that this bear run on the market would come to an end. One indicator was the RSI, which is over 80 for the first time since 1995, and could be pointing towards the market being oversold, meaning a negative price correction could be impending. Another indicator was the spread between the DOWs 200 day moving average and closing price, which has exceeded as much as 13%. This is generally viewed as unsustainable.

The Dow Jones Industrial Average, or “the Dow”, is a price-weighted average of 30 significant stocks traded on the NYSE and the NASDAQ. Invented by Charles Dow back in 1896, the DJIA was created as a means of making it easy to communicate the general changes in stock market values. As a price-weighted average, it looks at the average price of all of the stocks in the index and gives greater weight to stocks with higher share prices. The end result is a number that can be spoken of in terms of points rather than dollar amounts and has a stable value even when mergers or stock splits happen. The index watches a range of companies to monitor the overall health of industry in the US. Originally only 12 companies were in the index, but this has changed over the years and now there are 30 stocks in the Dow.

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