Crossing Wall Street Review – February 6, 2018
By Eddy Elfenbein, editor of Crossing Wall Street and portfolio manager of the AdvisorShares Focused Equity ETF (Ticker: CWS)
Let’s look at some of yesterday’s damage. It ain’t pretty. The Dow Jones Industrial Average plunged 1,175 points—its greatest single-day point loss in history.
It was a slow build. By 2 pm, the Dow had lost about 330 points, which was making for a bad day, but it was nothing too serious. After that, things got very rough. Over the next hour, the Dow shed an additional 470 points, but that was only the beginning. In the next 10 minutes, the Dow dropped another 700 points.
At its lowest, the Dow was down 1,597.08 points. The previous record point loss was 777 points, so we were more than twice that (I’m talking about points, not percent). The NYSE employs a “circuit breaker” where trading shuts down for 15 minutes if the Dow loses 7%. That would have been about 1,800 points today, so we didn’t hit it.
By the closing bell, the Dow had lost 1,175.21 for a loss of 4.60%. That was more than the entire Dow was worth in 1984. The S&P 500 lost 113.19, also its greatest point loss ever, for a drop of 4.10%. (Note the unusually wide spread between the two indexes. That was due to a bad day for Boeing. Personally, I prefer the S&P 500.) The S&P 500 also easily dropped below its 50-day moving average. The index hasn’t traded below its 50-DMA since August.
I’ve been talking about points, but was this the worst day in percentage terms? Please—not even close! In the last decade, this was the S&P 500’s 25th worst day. To be precise, today wasn’t the weird thing. The truly weird thing was the ultra-low-volatility rally that preceded today. Today isn’t unprecedented. The couple of months leading up to today were.
In the last several newsletters, I’ve passed along several stats of us going so many days without a 1% drop or consecutive days closing within 3% or 5% of an all-time high. All those stats reflected one thing: our low-vol rally. Now, normal market behavior is returning. The VIX rose 115% today. That’s something you don’t see every day!
Let’s add some context. Even with today’s loss, the S&P 500 is still up 7% since Labor Day. For the year, the S&P 500 is down a little less than 1%.
The natural reaction is to ask, “what happened today?” It’s frustrating to say this, but this is what markets do. Every so often, things just freak the hell out. We think, X happened, therefore, what caused X? Sometimes, X just is.
There are a few items I can point to, but who knows how large a role they played. For example, this was Jay Powell’s first day as Fed chair. Greenspan started on the job a few weeks before the 1987 crash. It’s not rational but markets aren’t wild about change.
I was particularly struck by some activity in the Fed funds futures market. The futures started to signal that a fourth rate hike could be possible this year. That’s surprising. I believe the odds got up to about 26%, so possible but not probable. Either way, that’s unexpected and that could have helped freak the market out. The very strong ISM Non-Manufacturing report this morning may have given the rate hawks more confidence.
I usually open with a quote, but this time I’ll close with one of my favorites from Peter Lynch: “The real key to making money in stocks is not to get scared out of them.”