Will The Stock Market Crash? We Explain The Theories Behind The Slump, And What’s To Come

02.06.18 2 weeks ago 2 Comments

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On Monday, the Dow lost everything it gained so far in 2018, losing 1500 points overall and experiencing its worst single-day decline ever at 1100 points, or just over 4.6%, by the closing bell. Tuesday doesn’t promise to be much better for investors, as the fallout spreads from the U.S. to Asia to Europe and possibly back again. So why did this happen? Is it a crash?

  • Wall Street got three bits of uncertain news last week that made it uneasy, starting with who runs the Federal Reserve: Jerome Powell yesterday took the role of Federal Reserve chairman, replacing Janet Yellen. Powell, despite serving on the Reserve’s board of governors since 2011, is largely an unknown quantity in Wall Street, and since the Reserve has been keeping it cheap to lend money, there’s some anxiety that Powell may tighten the purse strings, especially after the Federal Reserve noted an uptick in inflation.
  • The second was rising wages: The government reported that wages rose the most since 2009, although those rises were modest. Since labor is the highest cost for any industry, Wall Street was uncertain just what the outlook would be across the board.
  • And finally bond yields began improving: Interest rates on federal bonds have been rising, and investors are concerned that if bonds offer a better return than the stock market, funds and individuals will ditch stocks for bonds. It doesn’t help that the federal government is likely to need to issue more bonds in the future, and will likely promise a better rate of return.
  • Those jitters triggered a sell-off, although it wasn’t a crash: The stock market has been on a run since 2009, really, and all this plunge (although admittedly high in numbers) did was bring the market back to the level it was at in December. Many experts think the market was simply overvalued, and that this was a correction, not a crash.

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