The stock market has taken investors on a wild ride in the past week as stock prices have plunged, giving up all their gains achieved so far in 2018.
The carnage began last Friday, when the government reported a 2.9 percent jump in average hourly earnings in December. That normally good news sent shivers through the bond market, suggesting that wage inflation could be just around the corner. Bond yields, an indicator of interest rates, shot higher.
The Dow Jones Industrial Average, which closed at 26,306 the previous day -- February 1 -- has engaged in wild intraday swings ever since, closing 1,000 points lower at 23,860 Thursday, a loss of nine percent in a week. It's now 949 points lower than where it began the year.
Back to normal
Economist Joel Naroff, of Naroff Economic Advisors, is telling clients that the stock market has finally begun to behave normally again.
"Over the past two years, the NASDAQ had surged 76 percent, the Dow jumped 70 percent and the S&P 500 Index increased 57 percent," Naroff said. "In other words, the equity markets skyrocketed and until the past week, there were no extended down moves."
The economy currently shows signs of strength and corporate earnings are described as spectacular. But Naroff says most of the time the markets were achieving record highs, the economy was just so-so.
"Was it really reasonable to believe the huge stock price rise could continue without any correction?" he asked.
Keep it in perspective
Greg McBride, chief financial analyst at BankRate, says it is important for the average investor, who may have their retirement savings in stocks, to keep the current selloff in perspective.
“The latest decline takes us back to where we were November 17 last year," McBride said. "We’ve just given back some recent gains, not wiped out anyone’s life savings. If you put $100 into the market at the January 26 peak, you’d still have $90.”
McBride says it might be natural to wonder if there's been a fundamental change in the economy when the market sells off like this. But he says nothing is wrong economically, there's just some healthy, overdue price adjustments taking place.
But Naroff sees some economic factors ahead that he says will likely continue to affect stocks. Steep tax cuts and increases in government spending, along with a tightening labor market, could bring on inflation sooner rather than later. Because of that, he expects the stock market to remain a turbulent place for weeks to come.
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