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Dow plunges 1000 points
- koolba 9y agoCall me old fashioned but it's a nice change of pace to see news about traditional market indexes crashing rather just crypto currencies.
- ganeshkrishnan 9y agoDifferent reasons. I suspect this is due to traders taking their yearly profits and then stampede set in. The volatility index has a very sudden spike at the end of the market https://finance.yahoo.com/chart/%5EVIX/ https://finance.yahoo.com/chart/%5EVIX/
- cpncrunch 9y agoIt's due to interest rates and bond yields. https://www.bloomberg.com/gadfly/articles/2018-02-05/stock-investors-don-t-need-to-worry-about-bonds-just-yet https://www.bloomberg.com/gadfly/articles/2018-02-05/stock-i...
- chatmasta 9y agoTraders “taking their yearly profits” does not affect the market like this; such events would already be priced into the market. The Dow is not a crypto exchange.
- JKCalhoun 9y ago> I suspect this is due to traders taking their yearly profits Thought that happened in December, not February. A short year for traders this year, I guess. (unintentional pun)
- antishatter 9y agoNope, Nov through January are historically great months for stocks with February usually being one of the worst. One cause of this may be fiscal tax years not necessarily aligning with calendar tax years. Edit: One of the more interesting and notable causes is that many fund managers and investment advisors will actually rebalance portfolios so that at years end it appears they were holding the biggest winner stocks/assets. Basically a marketing trick.
- dvfjsdhgfv 9y agoI'd prefer to see the news about cryptocurrencies crashing rather than traditional markets.
- adsfasdfsad111 9y agoStock market is way overvalued. Prepare for a crash.
- workthrowaway27 9y agoI'd be interested to see the value of the stock market compared to interest rates. My bet is the market is only a little bit high if you account for how low interest rates have been for the past ~10 years.
- deleted 9y ago[deleted]
- bduerst 9y agoDid you mean inflation rates? Because the interest rates control the cost of new money, while inflation reflects the change in value.
- dragonwriter 9y agoWell, interest rates are the yield an on alternative investment to stocks, so they make sense as a comparator, too.
- workthrowaway27 9y agoNo, I meant interest rates. There's an inverse correlation between interest rates and asset prices. Most governments have been keeping interest rates low since the financial crisis to spur investment, which causes asset rates to rise. So while asset prices are high on an absolute level interest rates are also much lower than the historical average. My guess is that if you account for interest rates being so low assets aren't priced all that highly.
- sehugg 9y agoWell, you've got both today :) BTC hit a daily low of 6600 at about the same time that the Dow bottomed out.
- krrrh 9y agoIt’s important to qualify that BTC’s “daily low of $6600” is actually only an 80 day low, and a price that was an all-time high on Nov 1st. The DJIA ”bottoming out" is so far just a return to prices from just over a month ago. There’s a lot more room to go down.
- bhouston 9y agoI do worry that this is the end of the current bull market and we'll be entered into a recession in the next half year or so.
- adventured 9y agoIt's practically guaranteed, unless the Fed rapidly adjusts back to being accomodating by slashing rates. The sugar high from the tax cuts will buy a few quarters of time at best.
- ganeshkrishnan 9y agoRecessions are technically at the minimum 9 months, three quarters of negative growth Edit: it's two quarters as pointed out below
- adventured 9y agoRecessions in the US are almost universally defined as being at least two consecutive quarters of economic contraction / negative GDP. https://www.investopedia.com/terms/r/recession.asp https://www.investopedia.com/terms/r/recession.asp
- ganeshkrishnan 9y agoYes you are right.
- dragonwriter 9y agoRecessions in the US are defined by NBER, and while they usually include two consecutive quarters of GDP contraction, that is not always the case, and it certainly is not the definition (as GDP is not the only factor considered.) Notably, the 2001 recession did not include two consecutive quarters of GDP contraction, and while the 2007-2009 did include more than two consecutive quarters of GDP decline, they weren't at the beginning of the recession. http://www.nber.org/cycles/recessions_faq.html http://www.nber.org/cycles/recessions_faq.html
- bhouston 9y ago
- nodesocket 9y agoAt one point down -1,600. I did a little buying today (BRK.B), this was margin calls, algo trading, and fear.
- cpncrunch 9y agoIt's certainly a good idea to buy when stocks are undervalued. However at the moment they are likely still overvalued, and it's also quite early days in this current sell-off. I just sold my entire portfolio (apart from retirement funds) earlier this morning, as we want to buy a house later in the year and don't want to get trapped if the stock market completely crashes.
- nodesocket 9y agoCongratulations on the future house. We shall see about the market, but today's crash is POSSIBLY where can you can make money.
- psyc 9y agoI’ve been watching for a sell signal for about 6 months, and I also got (mostly) out this morning.
- refurb 9y agoThe chance of you actually timing getting back into the market at the right point is really low. Miss the best days of a run up and you're giving up 75%+ of your returns. Far better to hold steady.
- psyc 9y agoIt’s been 10 years. Pretty epic bull run. I’ll cross the re-entry bridge at a later date.
- buttcoinslol 9y agoThere are other strategies to protect long positions if you have cash or an appetite for risk, this allows you to realize the gains from holding during the entire runup. It does require a good exit strategy for whatever hedge you choose.
- rmrm 9y agopart of my biggest sell indication was a visit to the site zerohedge. They are a very bearish - gold centric site. I like to visit sites like these to balance out the generally optimistic news one sees elsewhere. Recently, I have noticed that the site has lost their commenters - they are all making fun of the site and how it cost them so much money, missing out on all these gains. I realized that completely aside from things like inflation upticking, the fed removing some QE, market being incredibly highly valued - that if one of the largest bear sites around had actually lost their crowd, that even that rank and file thought it was stupid to doubt that the DOW would only go up...it might be time to think about taking a step back. At least until post-Brexit next year.
- ry4n413 9y agoit's simple... Higher than Expected Inflation = Faster than expected Rising Interest Rates = Cuts in Growth Outlook = Stocks go Down
- valuearb 9y agoI hate to be nitpicking about good news, but the S&P 500 is down less than 7% from it's peak, that's hardly a crash. Especially after gaining 26% over the previous year. And, after increasing over 90% the last 5 years. Obviously, either way a decline in the stock market indexes is good news for almost everyone. I'm hoping for a real crash as I need to save lots more money, not just for my retirement but also for my kids college.
- dvfjsdhgfv 9y ago> Obviously, either way a decline in the stock market indexes is good news for almost everyone. I'm hoping for a real crash as I need to save lots more money, not just for my retirement but also for my kids college. Could you elaborate?
- lorenzq 9y agoYou don't want to buy your groceries when they're not on sale.
- optimuspaul 9y agobecause that would be stealing? :p Seriously though, I think this is a bad analogy. I buy groceries when I need groceries, sales have little bearing on that. A car however, that is something that wait for a deal before I buy.
- Normal_gaussian 9y agoMy car costs me about the same as my groceries over the same period of time; they are very comparable in price. As for sales - buying in season and buying in bulk saves huge amounts of money, a larger %age than I expect to get off a special deal on a car.
- marcosdumay 9y agoClosely controlling all of your grocery prices costs way more labor than closely controlling all of your car prices. That said, I do adjust the amount I buy from groceries based on the current price. It's a cheap (in labor) way to save on them, but has lower gains than actively searching for deals.
- KasianFranks 9y agoFlight to quality into crypto is setting up.
- rainbowmverse 9y agoI know what these words mean individually, but they don't seem to work when arranged like this.
- meri_dian 9y agoA market is like a forest and a market crash is like a forest fire. In order for the market to grow and be healthy in the long term, a purge every now and then is necessary.
- turc1656 9y agoAre you paraphrasing Batman Begins? If not, that's an amusing coincidence. "When a forest grows too wild a purging fire is inevitable and natural"
- PoachedSausage 9y agoLast time round (2008) we deferred the purge, when you do that the next forest fire is potentially even bigger.
- deleted 9y ago[deleted]
- sabujp 9y agoanyone watching daily technicals would have seen the RSI and MACD dropping last week, this should not be a surprise to anyone but noobs
- BoiledCabbage 9y agoAnd how many times have RSI and MACD droped and market not collapsed? You get zero credit for predicting a drop after it happened. And also little credit for "predicting" something based on any indicator with frequent false positives. Saying "I knew it" because one of 50 indicators showed something the day before is no different than what's happening in non-reproducability of research. State claims and indicators before and shows a track record of prior claims. But please don't after the fact claim "you knew it", everyone is a "newb". It subtracts from the conversation.
- antishatter 9y agoI on the other hand bought cheap out of the money puts three weeks ago with a march 16 expiration. I took credit for them today.
- quickthrower2 9y agoTo be fair, he said "not a surprise" rather than "predictable with 100% certainty". However you can't trade on not being surprised, you have to take a position.
- KasianFranks 9y agoAs a long time trader, I completely agree.
- syphilis2 9y agoIt's grim to see how unprepared websites are for sudden activity like this. I'm having a tough time logging in to my accounts.
- chatmasta 9y agoOn the bright side, at least sysadmins are first in line for a bank run.
- antishatter 9y agoWhich provider? I have never had any issue with mine.
- Firebrand 9y agoMust be investors pulling all their money out of stocks to put in crypto!
- fwdpropaganda 9y agoPlease tell me you're being sarcastic.
- an4rchy 9y agoInteresting to see the volatility in all these market these days. I wonder how much the spread of information/social media plays a role in this. it does seem like most of these swings seem to be from retail investors.
- abakker 9y agoInteresting that VIX has been at an all time low for the last year or more. So volatility has been at an all time low. These last few days have been rough, though.
- keebEz 9y agoVIX attempts to measure volatility but it is not volatility itself. The lowness of VIX has been driven by the relative increase of the denominator (total asset value, which has surged in the last few years) not by a decrease of the numerator. In general, it's usefulness as an indicator of volatility has decreased lately.
- marshray 9y agoVIX measures the risk premium on options on the S&P 500 index. I don't see how total asset value ends up in the denominator? Another explanation is that VIX is being actively dampened by the growing popularity of the 'short volatility' trade. E.g., the SVXY ETF among others. We're seeing today just how volatile volatility can be!
- dawhizkid 9y agoSurprised no one has made the cryptocurrency equivalent of VIX that moves in the opposite direction of a basket of cryptocurrencies.
- dereg 9y agoVIX is based off of the S&P 500 options premiums. There’s not an options market on crypto baskets that I know of (yet).
- AznHisoka 9y agoShort Overstock. It moves very closely in align with crypto.
- dlb_ 9y agoWhy is that? Do they have exposure to crypto?
- zitterbewegung 9y agoYes, they have been accepting crypto in payments for awhile and famously held a bunch. CEO is invested into it.
- wrigby 9y agoYeah, they've made it a point to emphasize that they're working on crypto / bitcoin related things[1]. 1: https://www.investopedia.com/news/overstock-goes-all-bitcoin-stock-climbs-300-2017/ https://www.investopedia.com/news/overstock-goes-all-bitcoin...
- peter303 9y agoBitcoin down almost 70% since high
- nobbis 9y agoVIX is a variance swap, so a "CryptoVIX" would move in line with the expected short-term realized volatility of a basket of cryptocurrencies, not their price. It'd certainly be possible to price such an index (replicating strategy of portfolio of strips of calls/puts of various cryptocurrencies) but it'd be impossible to hedge because transactions costs are too high. You could hedge with crypto-options, but AFAIK they don't exist yet.
- deleted 9y ago[deleted]
- throwaway30yo 9y agoThey are likely related, but it sure would have been interesting if the market went down 2000+ points at the same time Bitcoin was surging upwards.
- fullshark 9y agoBut that didn't happen. BTC failed today's test that it's a "store of value / gold alternative"
- mozumder 9y agoWhat's with the 600 pt 3pm sell-off and recovery within 5 minutes? Algorithms? I thought massive swing effects are supposed to be under control now?
- StriverGuy 9y agoMost are speculating a large asset manager getting hit with margin calls. The buy back was likely algos with limits getting hit.
- smallnamespace 9y ago> are supposed to be under control now Why would you think that? Massive swing effects are often caused or exacerbated by algorithms trading on momentum. They do that because trading on momentum usually pays, and doing the hard work of fundamental value investing is difficult and also hard to scale. Momentum trading is fine if only a few people are doing it, but if enough of the market transitions to having 'no opinion except following the crowd', then you get instability just like this. And many factors since 2010 have made flash crash-like events easier to cause, not harder.
- fwdpropaganda 9y agoUnlikely. Momentum works terribly for equities, doubt there are many people doing it.
- _rpd 9y ago> I thought massive swing effects are supposed to be under control now? The optimal strategy during a crash is to sell everything as soon as possible and buy again at the bottom. Massive swings are endemic to the market.
- Matt_Mickiewicz 9y agoI was just reading: https://static1.squarespace.com/static/5581f17ee4b01f59c2b1513a/t/59ea16dbbe42d6ff1cae589f/1508513505640/Artemis_Volatility+and+the+Alchemy+of+Risk_2017.pdf https://static1.squarespace.com/static/5581f17ee4b01f59c2b15... tldr; * The Global Short Volatility trade now represents an estimated $2+ trillion in financial engineering strategies that simultaneously exert influence over, and are influenced by, stock market volatility * Since 2009 Global Central Banks have pumped in $15 trillion in stimulus creating an imbalance in the investment demand for and supply of quality assets * Last month Austria issued a 100-year bond with a coupon of only 2.1%(6) that will lose close to half its value if interest rates rise 1% or more. * Amid this mania for investment, the stock market has begun self-cannibalizing... literally. Since 2009, US companies have spent a record $3.8 trillion on share buy-backs financed by historic levels of debt issuance. * Every decline in markets is aggressively bought by the market itself, further lowing volatility. * Volatility is now at multi-generational lows... Volatility is now the only undervalued asset class in the world. Equity and fixed income volatility are now at the lowest levels in financial history.
- fwdpropaganda 9y agoI will never understand what HN downvotes. This was a cool conribution. Weird paper, but substantial.
- quickthrower2 9y agoHow is Volatility an asset, and how does one take advantage of this?
- d--b 9y agoBanks sell derivatives indexed on vol, like vol swaps and var swaps. VIX futures also reflect stock market volatility, and their prices are based on S&P option prices.
- quickthrower2 9y agoAh VIX - I saw that https://news.ycombinator.com/item?id=16313832 https://news.ycombinator.com/item?id=16313832
- fujipadam 9y agoUnprecedented growth leads to unprecedented correction. This is profit booking but huge players. The market will stabilize and start rising again. The fundamentals are still strong
- matt4077 9y agoThe efficient market hypothesis would like a word with you...
- aaavl2821 9y agoWhen interest rates rise, stocks become less attractive relative to risk free assets. Even if fundamentals are strong, equity prices drop in response to higher than expected rates. Interest rates are a key input into asset prices and are somewhat independent from fundamentals
- adventured 9y agoHave you looked at the extreme bubble valuations that are essentially everywhere in the market? The fundamentals are horrific. 2.x% GDP growth stacked against peak PE ratios like ~40 by Coca Cola (KO), with zero (or negative) growth for years. Who are the crazy investors paying that? The US and global economy can't expand fast enough to pull down these multiples in a reasonable amount of time. 50 times earnings for PayPal, for astounding 15% style growth. And similar for Netflix, except at 200 times earnings. Or Activision up at 50x for similarly uninspiring growth. Could always buy Amazon on the moon at 150-200 times earnings, and wait a decade until their earnings catch up. There's always the exciting Microsoft, almost zero inflation adjusted growth for a decade ($17.6b in net income for 2008), in exchange I get to pay 30x earnings. I guess there's always Walmart. I can pay 23-26 times earnings, for a company that has had falling earnings for years. Or 28-30 times for 3M, where I can get years of zero growth for that nice fat multiple. And so on and so forth it goes, across the entire spectrum. Investors were begging to get crushed up at Dow 26k. The recent surge into the market by retail investors is one of the more classic indicators that a bull run is done. They universally arrive late to the party.
- jcomis 9y ago
- Avshalom 9y agoBiggest by absolute value or by percent?
- andys627 9y agoabsolute
- StriverGuy 9y agoAbsolute value. Not even close in percentage drops (see https://en.wikipedia.org/wiki/Black_Monday_(1987) https://en.wikipedia.org/wiki/Black_Monday_(1987))
- deleted 9y ago[deleted]
- matwood 9y agoIt's a great question, because point drops are not a very useful metric.
- chatmasta 9y agoThese days you can assume any number in a headline is as big as the editor could reasonably make it without violating too many technicalities.
- propman 9y agoInflation finally is going up after years and we can get out of this stagnating economy. Wage growth up 3% in new January report and so we can finally expect interest rates to rise faster like they did in the past. Many investors, especially institutional ones have for years thought the stock market has been over priced but where else to park money because interest rates are too low? Overall the 3% wage growth is huge for the economy especially because unemployment is so low. Other economic indicators also show a very healthy economy so when the next recession hits we'll have the tools to stop it. Inflation not rising has like stated baffled everyone so glad we are now dealing with what we know rather than wading into the unknown. The normal rules seem to apply again. This is also why presidents shouldn't make their number one accomplishment the market because often times market crashes don't correlate with recessions or a poor economy. Trump did have a huge effect on the market, but not 10% which he thinks he did. That said the market is still higher than it was 5 weeks ago. Risk averse savers will finally be rewarded. My biggest fear is the huge deficit, and the huge spending. I think the tax cut is great long term but could have been made significantly better, and could have scored under $100B deficit over 10 years under dynamic scoring (currently at 500B) if they decreased the top rate but still made it significantly higher than what it is today, and made the global min tax per individual countries but payable over time rather than all combined.
- adventured 9y agoThe wage growth would be nice, except actual wage growth isn't anywhere near 3%. That's the nominal figure. For production and non-managerial positions, which is nearly the entire economy, inflation adjusted annual wage growth is under 1%. We'll need to see 4% or 5% nominal wage growth, with inflation holding at 2% or lower, to generate meaningful wage gains at the median.
- cgb223 9y agoI haven't heard this side of the argument, do you have a source on that data?
- woolvalley 9y ago
- arthurjj 9y agoFor most HN readers this means you should be buying more stock.
- JabavuAdams 9y agoI did. Yesterday. :(
- jimmytucson 9y agoRight. Better yet, wait for the end of this correction, then buy more stock. Better still, sell any stock you own, and at the end of this correction, buy it all back and more at a cheaper price. Yeah, that’s the ticket! Guys, all we need to do is find out when this correction is going to end. I feel like we can narrow it down to between one day and one year from now.
- arbuge 9y ago>> wait for the end of this correction How exactly do you decide the end of it has been reached?
- samschooler 9y agoThat's the million dollar question, and is the exact reason why this strategy (and no strategy) is a silver bullet.
- pvdebbe 9y agoWhatever money I'd put in right now, I'd diversify the time component. Instead of buying 1x at once today, tomorrow, buy 0.2x every two/three days.
- quickthrower2 9y agoJust did a big fat sodl. Now I can't bear to look, pardon the pun.
- plaguuuuuu 9y agoPeople are out of their minds over a couple of minor red days and pullback to maybe one or two months ago. IMO it betrays a much deeper fragility in market confidence. I'm pretty new to finance and haven't lived through a crash yet, but IMHO, the show is not over, not by a long shot. And the longer we go without a crash, the more extreme it's gonna be.
- petercooper 9y agoCripes, it's plunged to levels only last seen 2 whole months ago.
- jedberg 9y agoLet's say you're a smart investor, and you think a big crash is coming. Right now everything you have is in stocks. What do you move it to to hedge your risk?\\ Edit: To clarify, I don't have everything in stocks. I'm just looking for good advice on how to further diversify. I'm aware that timing the market is a fool's errand. :)
- wutbrodo 9y agoIf you think a big crash is coming, you basically want to avoid high-volatility assets, right? So IIUC, you'd just want to move into lower-volatility assets: bonds, money-market funds, or TIPS if you want inflation protection.
- carbocation 9y agoIf your time horizon is long enough, Bogle would suggest that you don't try to time the market. Buffet obviously held some amount of cash so he could deploy it during extraordinary opportunities (such as the 2008/2009 crash).
- outside1234 9y agoA smart investor will always have a set of numbers in mind - say 60% stocks and 40% bonds - and every 6 months will rebalance the portfolio to that. Over decades this will return better returns at dramatically less stress than any other approach.
- mcintyre1994 9y agoI'm sure there's some dimensions it's not optimal on, but Vanguard LifeStrategy is a single low fee fund that does this for you. IIRC they have 20/40/60/80/100% equity options.
- allenbrunson 9y agoHere’s my own anecdote ... After hearing so many people say positive things about Vanguard for so long, I set up an account there. They had pretty much all my disposable cash, in a Roth IRA, for about two years. Rather than begin the predictable uptick in wealth I expected, my results, having about $25K parked there, was that I lost about 300 bucks. I sent several messages asking what I could do about it, their responses were gobbledygook that I did not understand, so I took all my money back out. Praying that I don’t wind up with a huge tax burden this year, due to this mistake. Here’s my message: regardless of the hype, Vanguard is not for unsophisticated investors. I am looking for an actual human being who can help me invest, now.
- patio11 9y ago"Fruits of capitalism available at a 3.5% discount to last month; limited time offer" would sell less ads, sadly.
- PoachedSausage 9y agoTulip bulbs available now at 3.5% discount, buy now.
- myth_buster 9y agoThink this is relevant here... https://www.npr.org/sections/money/2017/01/04/508261371/episode-443-dont-believe-the-hype https://www.npr.org/sections/money/2017/01/04/508261371/epis...
- narrator 9y agoYield curve isn't negative yet. I'd wait until that happens before calling it a bear market.
- jorblumesea 9y agoDOW != economy A stock crash is not a recession. The stock market is not the economy. Stocks falling is not a recession.
- dragonwriter 9y agoOTOH, stock market crashes are not uncorrelated with recessions.
- jorblumesea 9y agoThere are actually a lot of examples where this is not true 1987 stock crash? No recession. 1980-82 recession? No stock crash. 1992 recession? Also no stock crash.
- dragonwriter 9y agoThere's a big difference between “X is correlated with Y” and “X both implies and is implied by Y”. Instances that demonstrate that the latter is not true do not contradict the former.
- fallingfrog 9y agoA stock market crash only leads to recession if the preceding bubble was financed with debt. Which, sadly, might be the case this time due to leveraged buyouts and buybacks. In 2008, the housing bubble was financed with easy credit. In 1929, the stocks were all bought on the margin. Then it's really painful to unwind the bubble. If that is the case this time around, we'll know when all those companies that bought their own shares back at inflated prices go bankrupt at the same time.
- longerthoughts 9y agoTo put things in perspective: https://en.wikipedia.org/wiki/List_of_largest_daily_changes_in_the_Dow_Jones_Industrial_Average https://en.wikipedia.org/wiki/List_of_largest_daily_changes_... Saying "Biggest Point Drop in History" is a deliberate attention-grabber and incites more fear than it probably should. We should be more concerned with percentage changes and at -4.6% this doesn't even make the top 20 daily percentage drops, which cuts off at -6.98% for number 20 (see above link).
- deleted 9y ago[deleted]
- dkhenry 9y agoBut I think it clearly shows the standard of journalism we live with. This is a headline about numbers so we can easily debunk it by looking at the numbers, but almost every headline you read has been sensationalized in a similar fashion. This is the kind of reporting you expect from tabloids.
- leggomylibro 9y agoI dunno, I thought the BBC's coverage laid out some possible rationales without being too over-the-top. And while it isn't a tabloid, they aren't exactly a finance-focused paper: http://www.bbc.com/news/business-42942921 http://www.bbc.com/news/business-42942921 >...It is the largest fall in percentage terms since August 2011, when markets dropped in the aftermath of "Black Monday" when Standard & Poor's downgraded its credit rating of the US. >US investors are reacting to small but significant changes in the outlook for the American economy, and what that might mean for the cost of borrowing. >The stock market sell-off accelerated on Friday when the US Labour Department released employment numbers which showed stronger growth in wages than was anticipated. >If salaries rise, the expectation is that people will spend more and push inflation higher. >To keep that under control, America's central bank will need to raise interest rates, which is what has spooked investors who were expecting the US Federal Reserve to increase rates only two or three times this year. >They now predict there may be a few more interest rate rises on the horizon. >Monday's sell-off was driven by firms moving to sell stocks to put more money into assets such as bonds which benefit from higher rates, says Erin Gibbs, portfolio manager for S&P Global Market Intelligence. ...
- cs702 9y agoThe specter of rising interest rates in the US (driven by higher inflation expectations) appears to be a factor.[a] Fast-growing companies that are investing aggressively today and whose profits lie far in the future, in particular, are exposed to rising interest rates, due to the higher duration of such companies' cash flows. Duration, for those here who don't know, is a measure of the sensitivity of present value to interest rates.[b] Duration rises with the amount of time an investor must wait for cash flows, and vice versa. For example, the present value of $100 of cash flow in 10 years, if the 10-year rate is 2%, is equal to $100/(1.02^10) = $82; if the 10-year rate rises, say, from 2% to 3%, the present value declines to $100/(1.03^10) = $74, or a -10% decline. However, if the $100 in cash flow is in 30 years, and the 30-year rate rises from 2% to 3%, the present value declines from $100/(1.02^30) = $55 to $100/(1.03^30) = $41, or a -25% decline. In this example, an increase in duration from 10 to 30 years caused the sensitivity of present value to a 1% rise in interest rates to change from a -10% decline to a -25% decline. The longer an investor has to wait for cash flows, the greater the sensitivity of present value to changes in interest rates. The same ruthless logic applies to companies. The present value of companies whose profitability is in a distant future declines much faster when interest rates rise than the present value of companies certain to generate cash flows in the near future. Until recently, due to historically low interest rates and no prospects for inflation, the stock market has been rewarding high-investment companies that are sacrificing current profits for growth. If interest rates continue to rise (along with expected inflation), I'd expect this abruptly to change -- in which case, strap on your seat belts! [a] https://www.ft.com/content/af1f8e4a-0a23-11e8-8eb7-42f857ea9f09 https://www.ft.com/content/af1f8e4a-0a23-11e8-8eb7-42f857ea9... [b] https://www.investopedia.com/terms/d/duration.asp https://www.investopedia.com/terms/d/duration.asp
- dmode 9y agoI would not have worried too much of a Dow correction, but I feel like a trifecta of events are coming together that is a bit concerning. First, is the explosion of US government deficit which could potentially lead to austerity measures in the near future. Second is the threat of inflation and overheating. And third is the plunging savings rate of individuals. It almost appears that these three are moving to a confluence. Austerity + rise in interest rates + depleted savings could lead to a consumer spending crash in the near future.
- candiodari 9y agoWell, all of Europe has been suffering under austerity for something like 10 years now. My money is on that it will come to the US.
- refurb 9y agoPlunging saving rates? Saving rates jumped after the last crash. They are far higher in the US than countries like Canada, for example.
- dmode 9y agoUS savings rate actually dropped to a 12 yr low recently https://www.marketwatch.com/story/why-the-savings-rate-falling-to-a-12-year-low-is-not-a-death-knell-for-the-us-economy-2018-01-29?mg=prod/accounts-mw https://www.marketwatch.com/story/why-the-savings-rate-falli...
- refurb 9y agoThanks for sharing that. Considering the noise in that chart (savings rate drops from 11% to 5% in one month?!?), I would question whether it's really a trend and how accurate the data is. One of my pet peeves with economic data - some leading indicator plummets after being high for years. Mass panic in news headlines, only for it to return to normal the next month.
- cmurf 9y agoThe dollar has weakened over the past year, so knock off 1/4 point off any quarterly GDP numbers proposed, and knock 10 points off the 23% the 401(k) supposedly got in the past year, and consider any inflation comes with assymetric timing risk where wages always lag by a lot. And now in real terms the past year's stock increases look a lot more ordinary rather than remarkable. It's not like the stock market is going to ignore a weakening dollar, in particular when the Treasury Secretary publicly says it's a good thing as if it's an actual policy to have a weak dollar. And working people have to feel the sting of inflation before they demand wage increases, they don't just automatically happen. Before that, interest rates going up might increase housing sales as people want to get "in" before the interest rates go up even more, and then housing will slowly taper off as inflation and interest rates take hold, and people get priced out of buying, since their wages will not keep up in the short term. Inflation also helps pump up tax revenue, and monetize debts. So the numbers will look better, but in real terms they won't be better for a while until the markets fully correct for inflation and then things stabilize a bit.
- matte_black 9y agoDon’t stress about this correction. No matter what happens, when it’s over we’ll get right back to making real money.
- iknowicouldturn 9y agoOnce again, Dow is an awful indicator even without the awful usage of absolute numbers when numbers are obviously higher now. Now the reason for my post. Where should I go for non-sensational finance news?
- purplezooey 9y agoBut why hasn't it happened already?
- m3kw9 9y agoAlso, Programmed trading, excitement in the run up = more people buying, more greed = more use of margins = more margin calls.
- CodeSheikh 9y agoJust by looking at the continuously negative % drop over the historical data, there's a pattern in 2008 (The Crash) 9/15/08 9/29/08 10/7/08 10/9/08 10/15/08 10/22/08 12/1/08 −4.42 −6.98 −5.11 −7.33 −7.87 −5.69 −7.70 8/4/11 8/8/11 8/10/11 −4.31 −5.55 −4.62 8/21/15 8/24/15 −3.12 −3.57 2/2/18 2/5/18 −2.54 −4.60 For 2018 to reach 2008 state, lets see if there are more significant (>-4%) drops in 2018 for us to start freaking out. Again this by all means is not a financial model, it is something that I put together to tell myself "Keep Calm"
- Mikeb85 9y agoIt's also just coming off an all-time high. The worst performer this session was the index's top performer in the run-up, which strongly suggests this drop was fueled by profit taking. One thing to realize is that the market sometimes just moves because of traders trading...
- fallingfrog 9y agoMarket crashes don't necessarily have to result in economic pain. But when they did, both in 2008 and 1929, it was because the rise in stock prices was financed by debt. I'm worried that that might be the case today in the form of leveraged buybacks and the like, but I can't find any statistics on how much of the current asset bubble was debt financed. I suppose we'll know soon enough.
- jonbarker 9y agoThis is also the first downward correction after a 59 year record month over month gain run of 10 consecutive up months. It's also been about 9 years since the last true recession so I'd say the alarmism in the headlines is warranted.