Why The Stock Market Should Bounce Back

Feb. 06--Monday's Dow Jones drop of more than 1,000 points set investors worrying about the money they had put into the market, though experts do not expect Wall Street to turn sour soon.

The major index had the biggest point loss in its history, though its recent months of rapid growth means that as a percentage total the dip was less than 5%.

But leaders including those in the White House said that the fundamentals of the economy are strong, and experts agree that the phenomenon was more blip than Black Monday.

It could be a correction for an overheated stock market

While the Dow Jones industrial average is often used as a benchmark for the economy writ large, it is actually an amalgamation of only 30 different stocks including Apple, Walt Disney and McDonald's.

Those stocks have enjoyed sustained growth in recent years, regularly reaching record highs despite the relative chaos of the daily news cycle dominated by the Russia investigation and fears of conflict in North Korea.

The Dow gained 25% last year despite the fact that growth during the U.S. economy's extended recovery from the 2008-2009 Great Recession was a relatively normal 2.3%.

Last year, during the booming stock market, analysts at Vanguard Group warned that there was "a little froth" and that there was a 70% chance of a correction, defined as a 10% or more change in stock prices to adjust for overvaluation.

Interest rates

One mover of stock prices has been an indicator that is anchored in the real world, the Federal Reserve's decision to raise interest rates for lending.

Those interest rates had been 0% from 2006 through the end of 2015 as the Fed tried to stimulate economic growth by making it easier to receive a loan.

Late last year interest rates were raised again in December to 1.5%, with more small hikes expected in 2018 to keep a control on inflation as the U.S. economy keeps motoring along.

Monday's fall came after a more than 600 point drop for the Dow on Friday, after a jobs report suggested that the labor market is tightening and that wages for workers is finally beginning to increase after years of stagnation.

It may seem counterintuitive that better outcomes for working people would make the stock market go down, though the positive data means that the interest rate increases will likely continue unabated, a possibility means an end to the relatively free money.

Former Federal Reserve Chairman Janet Yellen is now being replaced by President Trump appointee Jerome Powell, and it is unclear how he will react to the stock market fall.

Continued growth

Eric Schiffer, CEO of investment firm Patriarch, told the Daily News Monday that while the decline is a "is a side effect of success" he does not think it will damper the prospect of real growth in the U.S. economy.

The International Monetary Fund said last month at the global elite gala World Economic Forum raised the expected rate of global growth to 3.9%, adding that Trump's tax cuts were likely to play a role in boosting U.S. growth to 2.7%.

A model from the Federal Reserve's branch in Atlanta has also showed that the growth rate for the U.S. itself could climb to above 5% for the first quarter of 2018.

That level of growth would be the strongest since 2003, though other models such as the New York Fed's have more conservative estimates of around 3%.

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