1,000 Points and Counting

The long-running global stock rally turned into a rout Monday as the Dow Jones Industrial Average posted its largest-ever, single-day point decline and major indexes in the U.S., Europe and Asia gave up their gains for the year. Traders described a growing sense of anxiety throughout the day as the Dow briefly dropped nearly 1,600 points. Although it quickly pared losses, the blue-chip index closed down 1,175.21 points, or 4.6%, to 24345.75, its largest one-day percentage decline since August 2011.

Last year alone, the Dow Jones industrials soared 25.1% and the benchmark Standard & Poor’s 500 index gained 19.4%; The S&P 500 jumped an additional 7.5% just last month. The Dow, S&P 500, and the tech-heavy Nasdaq composite index all set record highs Jan. 26. The market has been propelled mainly by low interest rates, rising corporate earnings and economic growth both in the United States and abroad. In light of those gains, analysts had warned that the stock market probably would be more volatile in 2018 because prices simply can’t keep climbing without interruption.

“You had a market that was overbought and ripe for something to undermine its tranquility,” said Mark Luschini, chief investment strategist at Janney Capital. The VIX volatility index, a measure of market turbulence, skyrocketed a record 116% on Monday to the highest level since August 24, 2015, the last time the Dow plunged 1,000 points in a day. The spike signifies how calm Wall Street had been — and how unprepared the markets were for trouble.

CNNMoney’s Fear & Greed Index is flashing “fear,” underlining a major shift in market sentiment from a week ago when it was sitting in “extreme greed.” The Russell 2000, an index of smaller stocks that have heavy exposure to the U.S. economy, turned negative for 2018 for the first time. “Valuations got stretched and that led to a cascading effect today,” said Sam Stovall, chief investment strategist at CFRA Research. “The market has to correct itself — a resetting of the dials — before this bull market can continue.”

Despite the upheaval, some investors say the stock rally is merely pausing after a strong run whose scale and pace has taken many by surprise. “This is a healthy pullback,” said Jason Draho, head of tactical asset allocation Americas at UBS Wealth Management.

 

Keep those stops tight

Todd “Bubba” Horwitz