Dow Plunges: Should Investors Expect a Recovery?
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What is the main topic discussed in this episode?
This is Your Money Matters from The Wall Street Journal.
Welcome to Your Money Matters. I'm J.R. Whalen in New York.
What happened during Monday's historic Dow selloff and how big was the loss?
The Dow Jones Industrial Average suffered its worst loss in its history on Monday, dropping 1,175 points, or a 4.6% decline. So what's spooking the markets here in the U.S. and abroad? We're joined by Art Hogan, Managing Director and Chief Market Strategist at B. Reilly FBR. So, Art, Monday's sell-off followed several sell-offs last week, though not as severe. What is actually going on here, and what is upending the markets?
It's interesting. Oddly enough, what's up in the market says... There's three things, and it's all relatively counterintuitive. So we've gotten a host of good news, both on the economy and in earnings.
What three main factors does Art Hogan say contributed to the market plunge?
And stocks in the first three weeks of January had just a shot out of the blocks. So we're up about 7% coming into the year. That's certainly not a gain that's sustainable. And no one thought that we're going to be up 7% a month for the entire year. We did that on the heels of a very strong 2017. So valuations have certainly gotten stretched. The second thing that happened was, with that good news came rising yields on – U.S. Treasury. So the yield on the 10-year approached 3%. That's breaking out of a four-year range. That's a new high that we haven't seen in about four years. And investors start to get concerned that, A, the cost of capital will be an impediment for companies to grow their earnings.
But, B, the attraction of the yield on the 10-year might draw money out of the equity markets and into fixed income markets. And that's always a concern. I don't think we're there yet. I certainly don't think 3% or 3.5% is going to get a flood of money out of stocks and the bonds. But we've got to... we got from 2.5% to 3% pretty quickly. And the pace at which we got there has people concerned that this could be the beginning of something larger and a trend. And the third thing is, once the market starts to sell off, and we haven't seen this in quite some time, that momentum feeds on itself. So, Friday's sell-off led to today's sell-off. And as we tried to test some of the 50-day moving averages on some of the indices, and they failed.
That selling propelled and started to just get more traction and pick up more momentum. So it's momentum. It's too much good news baked into this market and rising yields.
Art, you mentioned computerized selling. Does that kick in when the market has dropped by a certain amount, and does it kick in as a way to sort of curb the momentum of a drop?
Well, there are circuit breakers that get put into place But those are set at percentages, right? So the market would have to be down 7%, right? And understanding we're down about 4% today. 7% would be about twice the point change that we saw today in real dollars. So we haven't gotten close to that circuit breaker level. But to your point about machine-driven selling, when different levels are breached, whether it's the 50-day moving average and if that breaks through that, selling pressure kicks in until it finds that next level, which is the 100-day moving average. So there's a lot of automated selling that happens. And also, there's a very high concentration of ownership of this market in ETFs. And that manifests itself in all stocks being sold.
So if you own the S&P 500 ETF, for example, and you're selling that, that puts pressure on all verticals, whether or not you are adversely affected by rising interest rates. So one example of that would be financials. Financials are one of the worst performing sectors over the last two trading days, and yet interest rates are moving higher. They should be the beneficiary of that. So this is selling that's indiscriminate and agnostic of what sector?
We're speaking with B. Riley, FBR Managing Director and Chief Market Strategist Art Hogan about Monday's broad sell-off on Wall Street, and you're listening to your Money Matters from The Wall Street Journal. Welcome back, everybody. Does any of this volatility we've seen in the last couple of days have anything to do with activities going on in Washington, whether it's an impasse or speculation about the tax bill or any kind of the just the ongoing daily fighting that seems to be going on?
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Chapters
5 chapters
1
What is the main topic discussed in this episode?
0:02–0:13
2
What happened during Monday's historic Dow selloff and how big was the loss?
0:13–0:51
3
What three main factors does Art Hogan say contributed to the market plunge?
0:51–4:22
4
How did rising 10‑year Treasury yields influence investor concerns about stocks?
4:22–7:31
5
How does momentum and technical selling (like breaking moving averages) amplify market declines?
7:31–8:13
Speakers
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