What do the recent drops in the stock market mean?

UTSA professor explains stock market activity

Traders and financial professionals work on the floor of the New York Stock Exchange (NYSE)
Traders and financial professionals work on the floor of the New York Stock Exchange (NYSE) (Drew Angerer/Getty Images)

SAN ANTONIO – The Dow Jones Industrial Average stock market index, which indicates the value of 30 large, publicly owned companies in the United States, fell 800 points Wednesday.

The 3% drop is something that happens rarely, according to Ronald Sweet, professor of finance at the University of Texas at San Antonio's College of Business.

"Obviously that's something that happens very rarely, actually less than 1% of the time. And a lot of years, there's no 3% drops at all. In fact, over half the years the last 60 or 70 years, there's been no 3% percent drop," Sweet said.

Sweet said the stock market is still up for the year by over 10%.

"Even though we've dropped 6% in the last few days, we are still positive for the year. So I think so far, this isn't panic. I think what the market is worried about is obviously the recession. And if we have a recession, the stock market sees we have a drop of 20%," Sweet said. "So far, you know, people sit and panic, (saying) 'I've lost all my 401K or my retirement' because we've only lost 5% or 6%, but you're still up double digits for the year."

Sweet said the big question is not how bad the market was today but rather if this trend will continue and become a true bear market, where 20% or more is lost. He cautions retail investors who want to get out of the stock market after hearing news of big drops.

"The typical retail investor is the last to get out at the bottom when they shouldn't be getting out," he said. "No one can say whether this is the time to get out or not. Remember back last year, the market fell 20% and then it roared right back. So a lot of people got out when the market fell 10%, 15%, 20%. They got out and the market roared right back and they ended up having lost a huge opportunity."

He said most retail investors who are saving for retirement and have 10, 20 or 30 years should probably just stick with what they're doing and not trade in an effort to prevent any bad financial decisions. 

"Some of those near retirement — in these gyrations, they maybe want to rethink if they're taking too much risk, because you certainly don't want a 20%, 30% drop in your portfolio right before you retire. It can be pretty devastating," Sweet said.

Sweet said it's unclear if the market will bounce back the next day or keep falling, so retail investors should not let emotion drive their decisions. He said they should assess their risk to determine if it's what they're trying to accomplish. 

Sweet said the inverted yield curve, which happens when interest rates on short-term bonds are higher than interest paid by long-term bonds, is not as inverted as it has been in past recessions.

"The inversion is about half of where we had been in previous recessions, but it is inverted."

He said the stock market doesn't wait for things to happen but rather it anticipates. 

"The market is looking at the next 20, 30 years. If it sees something bad happening in the next couple of years, people are going to get out of stocks now and it's going to cause the market to fall, you know, six months (or) a year before the recession happens," Sweet said. "So it all has to do with investors, long term, anticipating what's going to happen in the future.

Sweet said if there were to be a recession, some solid San Antonio companies, such as USAA, which is a financial services company, may feel a bigger impact. But more so, smaller companies would be hurt more.

"There are definitely impacts on bonuses, maybe smaller. People are going to spend less. That's going to hurt especially the smaller retail chains and their employees will probably see fewer hours or fewer people will be hired or people would be laid off."

The U.S. economy, however, currently remains strong with a historically low unemployment rate, booming consumer spending and a healthy financial system.

"Even though we're discouraged by the yield curve's shape right now, we see few signs of danger ahead," said John Lynch, LPL Research chief investment strategist, in a blog post. "Data shows the U.S. economy is on solid footing, and corporate debt spreads have remain(ed) contained in this latest bout of volatility. Financial conditions are still historically loose, yet there are few signs of excess in the financial system."

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