Volatility Is Scary—but It’s Normal
By the end of the day on Monday, the Dow experienced its largest one-day drop ever. The day’s losses were up to around 4.6 percent of the index’s value, which is not insignificant, but also not unheard of: A drop of more than 3 percent followed Brexit back in 2016. And Monday’s losses weren’t on anywhere near the scale a day in 1987 that earned its name from the erasure of more than 20 percent of the Dow’s value.
Watching the market tank, however precipitously, is always scary. That’s why Fidelity and Vanguard, crashed on Tuesday, as frantic investors clamored to check their portfolios. But even as the Dow slid in historic fashion, many analysts still weren’t panicking. Why? They’ve been expecting this type of adjustment for years.
For a moment on Tuesday morning, the stock market was on the way up. Then it plunged again, and continued to zig and zag as the day progressed. The Dow’s roller-coaster-like performance may seem unusual and dramatic, but it’s actually just a somewhat abrupt restoration of a fairly normal feature of markets: volatility.
The stock market has been on a historic bull run, hitting several new highs with mostly uninterrupted growth. This impressive streak has allowed the Dow to nearly quadruple since 2009. That’s why the impact of Monday’s enormous slide has been nowhere near as big as that of the crash in 1987, even though the recent drop-off seems large.
During the most recent run, there have been only a few small and short-lived moments when that upward trajectory has been halted or reversed. (When these moments are especially dramatic—when a major index loses 10 percent or more of its value—analysts call them “corrections.”) Historically, that type of uninterrupted growth isn’t normal. In fact, the lack of market dips is what lead to worry that perhaps a bubble was forming, and that stocks were artificially inflated.
Most analysts agree that there is little evidence that a sizable bubble exists—that the markets have been on a tear because the economy has slowly and steadily been strengthening since the end of the Great Recession. Since then, an improving labor market, higher corporate profits, and interest rates kept low by the Federal Reserve have meant boom times for big businesses and the investors who poured their money into the markets. Now, some of that may be changing, even if the fundamentals of the economy aren’t.
There have been plenty of theories about why the market has sunk, even though it’s considered difficult (if not impossible) to point to any single explanation. One of the more outlandish ideas is that the market is “testing” the Fed’s new leader, Jerome Powell, but that’s more conspiracy theory than reality. Others suggest that recent political and economic shifts might be behind the losses. The January jobs report showed that average hourly earnings grew 2.9 percent over the past year—the most significant growth since 2009. While that’s great news for most Americans, it could mean tighter profit margins for corporations. Further, a strengthening economy could mean that the Federal Reserve chooses to raise rates more drastically than it has in the past—which would be making securing credit and borrowing more expensive than they have been in years. As investors and business owners consider those potential changes, they could start making new calculations about where to put their money.
Even as the markets continue to fluctuate wildly, and volatility persists, it’s important to remember that the economy has lately been full of good news. Wages are growing, corporations are more profitable than ever, unemployment is low. While the most recent downturn might be unsettling, it’s actually pretty normal.
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