October is the most volatile month for the stock market. Everybody knows that. And Wednesday was a good example of what can happen without…
October is the most volatile month for the stock market. Everybody knows that.
And Wednesday was a good example of what can happen without any real warning.
The Dow Jones industrial average declined by 831.83 points, or nearly 3.2 percent. And over-the-counter stocks, including technology high-flyers, did even worse.
Depending on which measure you use, this was the worst day for Wall Street either this year or going back to the panic that followed Britain’s Brexit vote in 2016.
What caused Wednesday’s selloff? A lot of things and nothing at all.
What I mean is that there are plenty of reasons the stock market should be declining — the trade war with China and the fact that the Federal Reserve is raising interest rates vigorously are the two obvious ones.
There’s also the huge and growing US fiscal deficit. And political battles in Washington that started during the last presidential election seem endless and should unnerve investors.
There are also financial problems in Italy and Venezuela, a big oil exporter. And even a weakening economy in China, one of our biggest trading partners, is cause for concern that this could hurt US businesses even if the trade war abates.
In the global economy, we find that anyone else’s difficulties can have a big impact on the financial markets and the US economy.
So which of these was directly responsible for Wednesday’s selloff? None, unless you want to blame the fact that investors suddenly became aware that the “Wall of Worry” Wall Street says it likes to climb became too high.
Stocks have been weak since late last week when investors snapped out of their coma and realized that interest rates are climbing and that Fed Chairman Jerome Powell planned to keep raising them.
Powell went out of his way to be clear that he was worried about inflation and that rates were too low and feeding too much juice into the US economy.
Rates rose further early on Wednesday when the Treasury conducted one of its regular securities auctions. The 10-year note, for instance, peaked at a yield of 3.241 percent during the auction. Rates haven’t been this high in a decade.
But Wednesday’s rate rise shouldn’t have been enough, on its own, to cause the market to panic — except for the fact that stock investors have been ignoring that inconvenient development on rates for too long.
Equities have been rising almost nonstop for 10 years, thanks to the Fed’s decision in 2008 to bring interest rates down to near zero percent and subsequent decisions to keep them very low for very long.
With nowhere else to turn, investors and savers piled into stocks. And while people made a lot of money, they also became complacent and believed that the market always rises without chance of a major correction. Wednesday showed them that view is wrong.
Further fueling Wednesday’s selloff was the fact that computer models are programmed to sell when the selling gets bad. That’s why Wednesday’s trading session ended in a near panic.
Where from here? Stocks should be able to stabilize near term because Wall Street will be marketing Wednesday’s disaster as a “buying opportunity.”
But remember all the things I mentioned above. Any of them could lead to the next disaster.
