Why did the stock market tank? Should you be concerned about your investments?
What Caused the Stock Market to Crash?
When you witness a stock market crash, you know that the news isn’t good. But you may not have any idea what caused it in the first place. The latest crash occurred on Monday, February 5, 2018. The Dow Jones Industrial Average dropped a whopping 1,175 points, or 4.15%. This took the market’s losses for the year up to about 10%. This drop had been in the cards for a while. The Dow’s had been dropping steadily since the market peak in December, and things were bound to reach a breaking point.
The recent market drop had been foreshadowed by a number of factors, including: plummeting cryptocurrency values, political uncertainty (including the possible government shutdown over the weekend), and the potential for inflation to hurt economic growth.
What Caused the Stock Market to Tank?
Don’t be fooled by the financial experts who tell you that the stock market crashing is magically going to make you rich, if you invest heavily enough. While it is true that the stock market crashing can make some people rich, it can cause ruin to investors who are not prepared.
This crash is simply the inevitable result of a bull market that has been in motion for a decade, during which time the number of people investing in the stock market has gone through the roof. Any market with that many investors is going to have people who want to take their money out when they get nervous, however momentarily that happens.
There are many instructions on how to invest in the stock market, but most of them gloss over what caused the market to tank in the first place. In this article we’re going to take a deep dive into the causes of the epic stock crash to help you understand what really happened and prepare for the next round of crashes.
Oil Prices Slump After Saudi Arabia Increases Production
Oil prices sank after Saudi Arabia’s oil minister declared that the country would raise output to 10.6 million barrels a day to make up for any potential shortage.
Cheaper oil is bad for energy stocks, which could have contributed to the 100 point drop in the Dow Jones right after the open.
Coronavirus Spreads Fear on Wall Street
Coronavirus is a disease that causes diarrhea, vomiting and fever. It has recently been identified as the cause of severe acute respiratory syndrome (SARS), killing seven out of eight people it infects.
Although coronavirus only affects 280 people per year, officials are concerned that if a mutated version of the virus is released, thousands of people could die. In response to this threat, companies have begun developing vaccines.
A more likely threat is a large-scale epidemic. Such epidemics occur when a disease spreads across a large region, affecting hundreds to thousands of people. Even though an epidemic poses a serious threat to society, it's good for business for pharmaceutical companies.
What Does This Mean for Your Investments?
If the recent stock market tumble has you worried about your investments, don’t panic. This may be more trauma than drop-off. While it’s impossible to predict exactly what will happen to the economy, there are some things you can do to solidify your investments and minimize your losses.
Focus on Stocks You’re Invested in
One of the worst things you can do now is sit outside the market, waiting to see what’s going to happen. The best thing you can do is continue to invest in your current holdings to give yourself time to see how they perform.
Whether your investment portfolio is mostly individual stocks or (more likely) mutual funds, the market could have serious effects on your portfolio. Keep in mind, the market tends to react more to sustained market conditions rather than to short-term glitches. But that doesn’t mean the effects of this drop-off will go unnoticed by your portfolio.
Market conditions affect mutual funds differently. Whereas individual stocks react to all sorts of external conditions (like new hires, iGadgets, and videos) mutual funds react to how stock groups perform (like technology, value, and growth). In short, a mutual fund without Apple might have lost money in the recent market crash. But a mutual fund with Apple probably didn’t.