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The Dow’s Record Drop: What Happened?

Sunil Swami, Chief Investment Officer | FEB 05, 2018

Dow Drops a Record 1,175 Points Monday

The Dow Jones Industrial Average fell 1,175 points or 4.6% Monday. At one point during the day, the Dow fell more than 1,500 points, the biggest intraday drop in the history of the index. The Dow is now down 8.5% since setting its all-time high on January 26, 2018.  Global stock markets have also fallen along with the Dow.
There is no single reason why stock markets have fallen recently. However, several factors probably contributed to this decline. The Dow was up almost 50% since November 2016 without a meaningful correction. Exuberance often leads to a painful decline. The globally synchronized economic recovery that began last year appears to be strengthening and markets fear that it will lead to higher inflation, higher yields, and a hawkish monetary policy. After the financial crisis, central bankers around the world used extraordinary measures to support the global economy. This led to low and often negative yields in developed economies. Extraordinarily low yields caused stock valuations to become stretched. The tide is now turning and yields around the world are beginning to rise. Higher rates means stock valuations are returning to more normalized levels.
While we expect rising yields to be an ongoing headwind for the stock market, they are still low by historical standards and secular factors should keep them low for a long time. Strengthening global economies are good for earnings growth and eventually good for the stock market. We do not believe we are close to a recession and expect stocks to continue to do well after this correction. Though days like Monday can be unnerving for many, we believe this action was part of a correction that was overdue. 

This material is provided for informational and discussion purposes only. Please consult your legal counsel or financial advisor to determine how this information may apply to your own situation. The information should not be relied upon as investment advice or a solicitation. Statements of fact are from sources considered reliable but no representation or warranty is made as to their completeness or accuracy.

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About the Author

Sunil Swami, Chief Investment Officer

Mr. Swami has decades of experience in the investment management and related fields.

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