Stock Market Losses Sizable, Not Historical

Everyone knows it will happen: A surging stock market won't surge forever. The indexes may consistently go up over decades, but there are always dips in the market.

Throughout October, the Dow Jones Industrial Average erased its gains for 2018 after hitting an all-time closing high of 26,828.39 on Oct. 3. When a market takes a dip, there is no shortage of opinions as to why. Theories abound, ranging from new tariffs and an escalating trade war with China, to rising interest rates and the "October Effect."

Dr. Shannon Grimes, chair of the Cherokee County Libertarian Party, described the atmosphere around the markets as "fluctuations, ups and downs, overall economy doing well, and people wanting to assign blame and credit to those who don't normally deserve it."

A feature of the drop has been the sell-off of tech stocks -- particularly "FAANG" shares, or Facebook, Apple, Amazon, Netflix and Google, owned by Alphabet. Analysts say tech companies are affected by the China trade war because it is disrupting their supply routes.

"There are several things that might be responsible for changes in the market as a whole," said Dr. John Yeutter, associate professor of accounting at Northeastern State University and candidate for state auditor and inspector. "In general, investors dislike uncertainty, and we are living in very uncertain times."

Looking at the drop from a historical standpoint, seven of 11 sectors on the S&P 500 qualify as "corrections," meaning they have lost at least 10 percent of their value after their historic highs. Many analysts say investors shouldn't panic when losses do not even qualify as a "crash." Black Monday in 1987 wiped out 22.6 percent of the market's value in one day. In 1929, the Dow lost a quarter of its value in two days. During 2007-'09, the New York indexes -- or indices -- lost 20 percent of their value.

"The big shifts in the market aren't quite so big is what many were making them out to be," Grimes said. "Ten years ago or more, those would have been sizable shifts, but now we're talking about 1 or 2 percentage points per session, which is not that big a deal."

Several reasons are cited as possible causes of the correction, but it is probably a combination of factors.

Among the causes most often cited is the risk to profit margins. Third-quarter financial reports have been strong, but some CEOs and boards of directors are grumbling about increased material and production costs due to tariffs the Trump administration has enacted to reduce trade deficits. To protect profit margins, companies might pass costs to the consumer. The CBOE Volatility Index, or "fear gauge," asks traders how the S&B 500 will perform short-term. It was recently measured at 25, the highest since there were tremors in the market earlier in 2018.

"In addition to this, because the economy seems to be doing well, interest rates have risen," Yeutter said. "This increase in interest rates increases costs for companies, and thus causes lower stock prices."

As is common when the economy heats up, the Federal Reserve is raising interest rates -- three times this year, with a fourth hike expected in December. Former fed chair Bill Martin famously described it as taking away the punch bowl "just as the party gets going." President Trump has voiced his displeasure, but the Fed tightens its hold on money during good times to reduce inflation. During the correction, bank stocks took a hit as home sales slowed.

Also slowing is China's economy. It grew 6.5 percent in the third quarter, less than expectations. China is responding to U.S. tariffs with their own duties on American goods. American products and materials are already expensive in China due to a strong dollar, which could reduce demand and hurt U.S. exporters.

Investors might also be looking toward Tuesday's midterms.

Readers were asked in a Tahlequah Daily Press online poll to pick from a list of reasons they thought the market was flat for 2018. Results were:

--The tariffs imposed (or threatened) by the president make for an uncertain market; 11 votes.

--Investors are afraid Democrats will take over the House and put more regulations and taxes in place; five votes.

--The market is experiencing the inevitable correction it always does after a "bullish" period; five votes.

--Outside international forces are having unexpected effects; no votes.

--Combination of the above; 11 votes.

--Something else not listed; two votes.

--Have no clue; two votes.

Responses to the Nov. 3 TDP Saturday Forum on Facebook, which asked readers about the market's being "flat" for 2018, mostly pointed to the profitable long-term performance of the market. Some wondered whether the Fed's interest rate hikes would hinder growth.

"The volatility of the market in general is a symptom of how its traded now," wrote David Watts. "Just look at the increase of futures trading as an example. Overall though, like him or not, Trump has helped to create an economic movement. If you want a job, you can get one and consumer confidence is high. It's undeniable. It became clear to me when you saw the other side shift from denial to attempting to take credit."

To read other responses, visit www.facebook.com/tdpress/ and scroll down to the most recent Saturday Forum post.

Requests for comment were sent to NSU faculty Dr. Fitz Laux, professor of economics, and Dr. Sanchari Ghosh, assistant professor of economics at midday on Monday, but responses were not received by press time.

Dr. Brian Jackson, associate professor of accounting at NSU, was also contacted, but he declined to comment, saying, "I'm not really a market watcher."