Why Dow Jones Industrial Average Fell 831 Points? – Stock Market Volatility

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Stock Market Volatility

On October 10, the Dow Jones Industrial Average fell 831 points [1] from previous day closing.  This is the biggest fall since 1175 points on February 5 and 1032 points on February 8 [1].  The increased number of trading volume was observed as well [1].  It might be an uneasy situation for some of those who are investing in the stock market and may be wondering what is the driving factor of this stock market volatility.  Also you may be wondering that should you get out of stock market?  Others may be wondering that is this the end of bull market?

It’s been almost 10 years since the last recession triggered by the meltdown of subprime mortgage in 2008.  Exactly 10 years ago, the uncertainty was imminent and the congress rushed to pass $700 billion TARP, Troubled Asset Relief Program, to bail out the residential and commercial obligations.  It was right before general election and the concern towards recession were growing day by day.

10 years later, the housing market has been recovered and the economy seems it is doing very well recently.  This year the market seems a little volatile and some experts predict that the bear market could be imminent sometime soon.  Is this the beginning of 2008 again?


What the individual investor should know about

Should you be worried about your investment?  The short answer is no, not at all.  Why? Because 800 points sounds a lot but it’s still only 3.1% [1] of value.  It won’t even be in top 20 of the list [2].  If we look back in the past, there are so many sharp drops in the DJIA history.  7.18% on October 27, 1997 [2], 7.7% on December 1, 2008 [2], and staggering 22.6% on October 19, 1987 [2].  Comparing to these days in the past.  3.1% drop won’t be substantial.

Also our approach is long-term investment based on the value investing method.  You are going to hold on to your portfolio no matter what happens.  Only the time you should be concerned about selling your equity is that the company loses its intrinsic value or potential of future growth in long term perspective.  The headlines should not be the factor to influence your investment strategies.


Do not change 401(k) investment strategy based on the headlines

Especially your 401(k) fund should not be vacillated.  401(k) CAGR, compounded annual growth rate, is calculated by long term perspective not based on a year or two.  No one ever knows what might going to happen tomorrow including experts.  401(k) is 30 to 35 year game.  For instance, the winner of football game is determined by the final score at the end of 4th quarter.  The intermediate score doesn’t mean anything to determine the outcome of the game.  You may be leading or trailing the game but you will win the game if your score is higher than other team at the end of the game.  The stock market volatility is the last thing that you need to concern about your 401(k)


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What the market is really reacting against?

If we look at the economic indicators, there is no definitive factor to cause this stock market volatility as well.  The US and China trade relationship might be causing some fluctuation but it is certainly not enough reason to sink the stock market into the deep recession level.  The crude oil future is hovering around $70 [3] and the series of spikes and sharp drops have not been observed yet.  In 2008, the crude oil price tapped more than $140 a barrel in June 2008 and dipped below $50 by December 2008.


CPI and Home Price

The seasonally unadjusted monthly inflation rate is steady positive growth.  The seasonally unadjusted CPI growth over month to month this year is mostly around 0.1 to 0.3% [4], it is neither sharp rise nor fall.  The FOMC’s target federal funds rate is 2 to 2.25% as of September 2018 [5] announcement, not nearly as close as 5.25% in 2006 [5].  The fact that the Federal Reserve is expected to raise interest rate for upcoming FOMC meetings could be a slight motivation for investors to be little skeptical but not conclusive.  The average U.S. home price index is $216,000 according to Zillow [6] up by 6.5% over the last year.  The stock market volatility doesn’t seem it’s affecting housing market and there is not a sign of steep fall yet.


Wall Street Earnings

The numbers for quarterly earnings are not really bad for those companies consist major indices.  The net income is positive and even constantly beating the estimates.  Microsoft (MSFT), Intel (INTC), Costco (CSCO), and GM(GM) are all beating Wall Street’s estimate in past few quarters.  What about the banking sector?  JPMorgan Chase (JPM), Bank of America (BAC) and Citigroup (C) are all estimate beaters.  Only Wells Fargo is not beating the estimate but still makes more than $5 billion net income per quarter [7].  Nowhere nearby the catastrophic failure of 2008.  For the airline sector, Delta Air Lines (DAL), United Continental (UAL), American Airlines (AAL) are all beating earnings estimates.

The fluctuation from EPS estimate shouldn’t be the only factor of assessing the company’s financial status, but looking at the income statement and balance sheet, the reports are solid and they don’t look like the major stocks are experiencing red ink territory.


Traders and Investors

One thing you need to keep in your mind is there are two kinds of parties who trade the equity.  The first one is the trader and second is the investor.  The traders buy and sell stocks by only thinking the difference of pricing.  The traders typically hold the stocks for very short period of time, days to weeks, with an expectation that the price is going to increase.  The type of business or industry is not their interest.  They buy the particular stock merely because the price might going to increase in the near future.

On the other hand the investors are someone who is interested in buying a piece of business.  They study about the company’s business, industry, and financial statement.  The investors buy equity because they expect the business is going to grow in the future.  Therefore they spend the time before they make decision and will hold the stock typically for long time, years or decades.  Because the business doesn’t grow overnight.  The investors don’t trade as frequent and won’t be influenced by the stock market volatility.

These two parties take exactly the same action, buying and selling stocks but the approach is fundamentally different.  You want to be an investor rather than trader.  Because the price of stock fluctuates with or without a reason in short-term.  The method of buying a penny stock and sell it in two weeks to make profit won’t work in long term.  You will lose money, almost guaranteed.  The traders’ short-term sentiment is one of driving factor of this kind of stock market volatility as well.



As stated in the above, there is no definitive sign that deters the momentum of current economy.   It is a sporadic sentiment, which takes place every once a while.   Sure, eventually the market may be heading to the bear market.  But it’s a natural cycle of the economy and if you ever try to time the market, you lose opportunity to grow your asset.  Remember, every time the market suffers, it bounces back.  Stick to your plan and stay focused.




1. Yahoo Finance, Dow Jones Industrial Average (^DJI) historical data
accessed on 10/12/2018

2. Wikipedia.org, List of largest daily changes in the Dow Jones Industrial Average
accessed on 10/12/2018

3. CME Group, Light Sweet Crude Oil (WTI) Quotes
accessed on 10/12/2018

4. U.S. Bureau of Labor Statistics , BLS Data Viewer  
accessed on 10/12/2018

5. Board Of Governors Of The Federal Reserve System
FOMC’s target federal funds rate or range, change (basis points) and level 
accessed on 10/12/2018

6. Zillow United States Home Prices & Values
accessed on 10/12/2018

7. Yahoo Finance, Wells Fargo & Company (WFC)
accessed on 10/12/2018

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