What's Behind the Stock Market Plunge
Q: What caused Tuesday's stock market plunge?
A: Many investors are blaming yesterday's sell-off on China's market meltdown. On Tuesday, the Shanghai stock index lost nearly 9 percent of its value, as the government hinted that it wanted to find ways to curtail the huge amount of speculation in its stock market. This explains why some are referring to yesterday's stock slide as the "China Syndrome" or "the Shanghai Surprise."
But China was only one of many drivers that pushed stocks lower.
After weeks of stabilizing, oil prices are again marching higher. Yesterday, crude oil prices climbed back above $61 a barrel. Meanwhile, the Commerce Department reported that new orders for durable goods fell a surprising 7.8 percent in January–signaling that the economy many not be as resilient as some think. This seemed to support fears that former Federal Reserve Chairman Alan Greenspan raised this week, when he hinted that the U.S. economy could still slip into recession sometime this year.
Finally, adding to the selling was another round of geopolitical uncertainty, as reports emerged that Vice President Dick Cheney may have been the target of an unsuccessful suicide bombing attack this week during his trip to Afghanistan.
How bad was the sell-off?
When you measure it based on points, it was terrible. The Dow Jones industrial average fell 416.02 points, marking the biggest one-day decline since Sept. 17, 2001. It was also the seventh-worst single-day performance for the Dow ever.
But you have to remember that the Dow is starting off from a much higher base–in fact, it was trading near record highs before the slide. So while 416 points sounds terrible, it wasn't that bad when measured in percentage terms. On that basis, the Dow fell 3.3 percent Tuesday, which was the worst performance since the days leading up to the war in Iraq in March 2003. And on percentage terms, this didn't even crack the top 250 worst trading days in history.
How did the market react this morning?
While Asian stocks generally slumped in reaction to yesterday's news, the good news was that stocks rebounded in mainland China today–and they appear to be rebounding slightly in the U.S. as well. The Dow Jones industrial average jumped more than 60 points at the open, as some bargain hunters came into the picture. Then, the benchmark index fell back to about even. But by around 10:45 a.m. EST, the Dow was back up more than 100 points.
Was there a silver lining to the market's decline?
Yes. The sell-off offers some investors a buying opportunity to get back into the market. After all, stock prices are 3 percent cheaper than they were a day ago. Investors must also keep in mind that stock prices aren't supposed to go straight up. In fact, bull market rallies are usually peppered with minor sell-offs and corrections that give investors time to rest–and re-enter the market at attractive prices.
In this way, market slides can be thought of as earthquakes. While no one wants to live through a quake, it's always better to experience a minor tremor rather than the big one. And just as small tremors alleviate pressure making large quakes less likely, modest sell-offs often embolden the bulls in a bull market.
advertisement
