The Dow Jones Industrial Average, which is a bellwether index representing the state of the overall stock market, dramatically dropped 650 points on Friday and about 1,024 points today, at the time I am writing this piece (which I changed about 10 times already – down 300, now 500, 800, yikes 1,600, back to 800…). One thousand points makes this seem horrendous; however, before you start freaking out over this number (be prepared, the mass media will start reporting doom and gloom scenarios), from a percentage standpoint, it’s not too bad since the average was at an all-time high of about 26,000 points.
To put things into a proper perspective, since a few years past the financial crisis, the stock market has been on an incredible, skyrocket with an almost, uninterrupted upwards trajectory. For instance, the market has been up over 20% since the presidential election. This type of meteoric rise without a correction – about a 5% drop – is highly unusual. Stocks never go straight up forever. There is always something that spooks investors, which causes them to sell stocks and bonds, thereby creating downward pressure on prices. The reasons could change, but there is usually some event that shakes the confidence of investors. This decline then scares others and causes more people to sell. It looks like we are now in correction territory.
Global markets also fell and the US market opened down about 300 points today. Since many people have realized significant paper gains (meaning that the investors hold securities in their portfolios and didn’t sell them, so they are only paper profits as you only realize gains or losses when the securities are sold), they may decide to sell and lock in profits, especially in case the correction turns into a bear market (this is when the stock market drops between 10 and 20% or more).
Ironically, part of the decline was due to last week’s positively strong job report indicating that more people are working and wages are going up. While a normal person will view more jobs and better pay as a positive, Wall Street sees this as inflationary, where borrowing costs will go up for the government that borrows from everyone and every country, corporations, and consumers. These higher costs could then slow down and cool off economic growth. I know what you are thinking, Wall Street is a topsy-turvy, counter-intuitive world.
Also, there is an abundance of other events contributing to the big selloffs including, in part, worries about the recently-released memo alleging the FBI and Department of Justice abused their surveillance authority in the 2016 presidential election, coupled with the ongoing Mueller investigation, plus a nine-year upward run in stock prices, along with tensions with Russia and North Korea, the Philadelphia Eagles winning the Super Bowl over the New England Patriots, we have yet another Kardashian (Kylie Jenner gave birth over the weekend), and we will have to endure all the annoying new ads from the Super Bowl for the next six months.
These and other anxiety-inducing geopolitical and economic events caused, and will continue to promote anxiety among investors sitting on big fat profits, as they may want to sell in fear that these and other issues could wreck the stock market and wipe out their gains.
Wells Fargo, one of the largest banks in the US, and the subject of numerous compliance issues over the last year, saw its stock price fall about 10 percent today. The Federal Reserve imposed regulatory restrictions on the bank, forcing it to improve its governance and controls, in the wake of several sales scandasl at the bank. The Fed informed Wells Fargo that it won’t be permitted to grow beyond $1.95 trillion in assets (yes, trillion, that’s not a typo) until it gets its sh!t together. Although, the Fed said it in a much more professional manner. Analysts predict that this edict will shave off $400 million in annual profits.
Given the current deregulatory environment under the new Trump administration, it seems that the Fed is making a statement that they are not completely out of the game and sitting idly on the sidelines.
To mix sports metaphors, Wells Fargo will be in the penalty box for a while, everyone will forget about their unauthorized opening of accounts (which most people have already done so), and the bank will skate out free and clear in no time. Also, the Fed could show that they are an enforcer not to be trifled with.
Bitcoin, the name usually synonymous with cryptocurrency, fell again today, about 10 percent, due to concerns about a global regulatory clampdown on the trading of the digital coins, several countries putting restrictions into place against engaging in Bitcoin trading, and certain banking and financial intuitions stating that they will not accept Bitcoin transactions. Bitcoin traded under $8,000.00, which is more than half of its value of $20,000.00 in December.
Don’t cry for the early investors, as Bitcoin has surged more than 1,300 percent last year. For newbie investors who bought in December, they got sacked.