The US stock market faced its biggest downfall since 2011 on 2nd February, with over $4 trillion being wiped off the value of stock markets internationally.
Dow Jones Industrial Average, one of the single most watched indices on the New York Stock Exchange, had a record high drop of 1,175 points, as well as America’s own Standard and Poor’s 500 (S&P) seeing its biggest tumble.
Although this overall drop sounds significant, it is very small compared to the October Stock Market Crash in 1929 which saw indexes fall by more than 20 percent. Many economists would not go as far as calling it a crash or decline but just a reaction to potential economic changes.
While it took less than twenty-four hours for the market to recover, there were also knock on effects on international markets – London’s FTSE 100 index closed 108 points down (1.46 percent). In Tuesday’s early Asian trade, stocks were falling similar to the scenes of Wall Street days before. Japan’s benchmark Nikkei 225 sank 4.8 percent and in South Korea, the Kospi lost 2.3 percent.
The White House said in a statement that President Trump was focused on “our long-term economic fundamentals, which remain exceptionally strong.” The statement mentioned strengthening economic growth, low unemployment and increasing wages for workers.
However, with no notable world shock causing this plunge in the market, it seems to have been the fear of rising interest rates which currently stand at 1.5 percent, that caused investors to panic, leading to the global sell off.
A recent meeting held days before by the Federal Reserve System (FED), the US’s central bank, warned that there could be increasing pressures of inflation throughout 2018 that come with America’s strengthening economy. “People are dealing with the shock of seeing real inflation for the first time in a while,” said Bruce McCain, chief investment strategist at Key Private Bank.
As a result, investors decided to sell out of stocks to be able to put this money into assets such as bonds, in the hope for a higher return from potential increases in the bank rate, which could rise to 3.25 percent by 2019.
“This isn’t a collapse of the economy. This isn’t a concern that markets aren’t going to do well,” said Erin Gibbs, portfolio manager for S&P Global Market Intelligence. “This is concern that the economy is actually doing much better than expected and so we need to re-evaluate”.