No, it is not time to panic. But February’s wild swings in the Dow Jones Industrial Average have generated some excitement while providing an opportunity to examine the role the stock market plays in the economy.
The Dow — an indexing of the stock prices of 30 major companies, including Boeing and Nike — fell 1,175 points on Monday. That was the largest single-day decline in the history of the index; placed in context, however, it was nowhere near Wall Street’s worst day.
With the market consistently being at or near record levels, Monday’s decline represented about 4.6 percent of the index’s value; in the “Black Monday” collapse of Oct. 19, 1987, the Dow fell 22.6 percent, the most precipitous one-day decline in history. During the four-day crash of October 1929 that was triggered on “Black Tuesday” and presaged The Great Depression, the stock market fell about 25 percent and investors lost (in 2017 dollars) about $200 billion.
Anyway, Monday’s drop at one point was nearly 1,600 points, following a decline of 665 points on Friday. On Tuesday, the Dow gained 567 points, one of the largest upticks in history. All of that is enough to pique our interest but hardly a reason for panic.
We know, we know, those are a lot of numbers. And the daily minutiae of the stock market doesn’t mean a whole lot to most Americans. As long as the market goes up over time, many of us are content to glance at our 401(k) statements every quarter and leave it at that. Indeed, the market has shown sustained growth over the past several years. Experts said this week’s drop was nothing more than a long-anticipated correction — investors selling to cash in on profits from sustained price increases. Tuesday’s big gains after an initial sell-off confirmed that theory.
President Donald Trump often has pointed to a booming stock market as proof of his successful economic policies. But this, too, requires some context. In the first year of Trump’s presidency, the market increased 32.1 percent. That is impressive, but not unprecedented and not out of context with previous administrations. During the first year of the Obama presidency, the market increased 28 percent.
In truth, there is only so much federal policymakers can do to influence the stock market, and there is much more to the economy than stock prices. According to the Federal Reserve, only about one-third of Americans in the bottom half of earners own stock — either directly or indirectly through 401(k) plans. For them, economic security depends more upon steadily increasing wages and reasonable health care costs than a booming stock market.
As Greg Valliere, chief global strategist for Horizon Investments, told CNN: “It’s a risky game to talk about the markets. But it seems like Trump is going to live or die by the stock market. It’s risky because many people in his base don’t like the market. They hate Wall Street.”
We don’t hate Wall Street. Investment in American companies helps generate innovation and growth and is one of the pillars of a capitalist economy. It also has served the United States well, as this nation grew into the world’s largest economy during the period between the Civil War and 1900 — a global-leading status it has held ever since. These days, the U.S. economy remains about 60 percent more productive than second-ranked China.
Given all of that, the ups and downs of the stock market are no cause for panic. But you might be leery about looking at your 401(k) statement over the next couple weeks.
