Stock Market Plummets: Crisis or Capitalism?

Posted by on Feb 14, 2018 in Economics

On Monday, the Dow Jones Industrial Average lost more than 1,500 points (more than 6%). This was the worst fall in six years, and at one point, the biggest one-day drop in history. So should we panic?

Abstract view of a stock market digital display board

Credit: leungchopan/Shutterstock

What Caused the Plunge?

The drop wasn’t caused by any one fundamental thing. Instead, there were a number of factors involved. One was fear over rising interest rates (rising rates can slow the economy). Average hourly earnings also rose quite a bit in January. Perhaps most importantly, the market can’t keep climbing forever. And it’s gone up 40% since Trump was elected president – a phenomenon sometimes referred to as the “Trump bump.” The market was bound to come back down eventually. Market fluctuations of this type are to be expected and do not mean that there is anything fundamentally wrong with the economy.

Did the Stock Market Actually Crash?

In truth, last week’s drop was nothing compared to the 1929 stock market crash that preceded the Great Depression. That time, the Dow fell by 13% one day and 12% the next.

In fact, what happened Monday wasn’t even technically a crash. A true crash is defined by a rapid drop of 20% or more. This has only happened four times in American history: the 1929 Black Tuesday crash, Black Monday in 1987, the dot-com bust in 2000, and the 2008 financial crisis that led to the “Great Recession.” Instead, financial experts are calling Monday’s drop a “correction,” which is a decline between 10% and 20% from a significant peak. Corrections are much more common: there have been 10 in the past 20 years. And there hasn’t been a correction for the last 9 years, which means we were overdue for one.

So is it Time to Panic?

Not at all. Experts are quick to point out that stock market declines don’t cause recessions. And the economy as a whole is still healthy. There was no banking crash. Unemployment is at near-record lows. Wages for American workers are rising at record rates. Corporations are bringing back money from overseas and investing those dollars here in the U.S., which spurs new growth and production.

Also, when investing in the stock market, it’s important to think about the long run, and not worry too much about one-day fluctuations. Experts encourage people to keep investing in the market. In fact, now that the price of stocks has dropped, it’s a great time to buy at a bargain price.

What Do You Think? Imagine that you find $100 lying on the sidewalk. Based on this article and what you’ve seen in the news, would you invest that $100 in the stock market? Why or why not?