Market suffers steep drop and then bounces
What was that all about?
We all know about volatility. The market is volatile; it has been especially volatile in recent years. Yet, we also know that over time the market gains more than it loses, so we expect volatility, we should stay invested. To do otherwise is to bet against the market, which, again, over time, is not wise.
So let’s look at what happened and why. On Wednesday of last week, the market declined 832 points (as measured by the Dow) or about 3%, the Nasdaq dropped 4%. This was followed by a drop of 546 points before finally recovering part of the loss.
Why did the market drop? In a word (actually two words) interest rates. They went up. It was not just the trajectory. We have been expecting interest rates to rise for some time. It was the speed by which the rates increased. In four days long term rates went up 17 basis points (a basis point is one hundredth of 1 percent). Investors and the markets get excited about sudden moves like that. Also, recently, the Federal Reserve changed the language in their after meeting message to remove the word “accommodative”. That may not seem to be a big deal, but to the markets, it was a big deal. The Fed has been accommodative to the market for years, but now they say they won’t be accommodative. What does that bring? Uncertainty! What does the market and investors not like? All together now: UNCERTAINTY! We have discussed this before.