The Dow is in free fall again and the blame, again, goes to the trade fight between the U.S. and China.
If you get rattled when the stock market behaves erratically and the Dow careens — up and down hundreds of points in a single day — brace yourself.
The era of calm markets and small price swings is over. The new normal on Wall Street is all about wild fluctuations, mammoth moves like the Dow Jones industrial average’s 1,000-point drops earlier this year, and rapid-fire price reversals that can shift the mood of the market from optimism to pessimism in a matter of minutes — and sometime seconds.
Three of the Dow’s biggest daily point drops in its 122-year history, including its 1,175-point record fall on Feb. 5, have occurred this year. And its wild ride Friday, when it plunged 767 points before ending the day down 572 points, illustrates a return to volatility.
There have already been 27 trading days in 2018 on which the Standard & Poor’s 500 stock index has closed up or down by more than 1%, compared to just eight days in all of last year, according to S&P Dow Jones Indices. If the current pace of 1% swings persists through year-end, it would put the large-company stock index on track for its most volatile year since the financial crisis.
The roller coaster that has investors on edge has been powered by a barrage of unsettling headlines: The war of words between the U.S. and China over tariffs. A series of market-moving tweets from President Trump. A troubling stream of news related to Facebook and its data-privacy crisis. Setbacks in the self-driving car business. Ongoing worries about the threat from rising interest rates and inflation.
There’s a lot of uncertainty right now, and investors hate uncertainty.
The “market environment has changed,” and investors are reassessing the new risks, Michael Farr, president of Washington, D.C.-money management firm Farr, Miller & Washington, told clients in a report titled “The New Normal.”
“With all the uncertainty,” he wrote, “markets will react and they will have larger price moves.”
In an attempt to soothe investors’ frayed nerves, Wall Street pros insist last year’s quiet rally that pushed the Dow up 25% was the anomaly, and that the more violent price action early this year is more normal market behavior.
“Market turmoil is an innate element of being an investor,” says Jon Swaney, co-head of strategic asset allocation at New York Life Investment Management. “It feels raw at the moment and it is not entirely pleasant. But in the near term, investors have to accept the fact that their account balance will bounce around more than it did last year.”
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But a bumpy ride, Swaney adds, doesn’t mean Main Street investors should abandon their long-term financial plans. Citing the 2008 financial crisis and the bursting of the tech bubble back in 2000, he says the market has seen much worse.