Why the Dow Is Plummeting -- and Why You Shouldn't Care
It's easy to feel a sense of panic on a day like today, when the Dow Jones Industrial Average is off by 344 points, or 2.28%, with an hour left in trading. But for what it's worth, there's simply no reason to be concerned -- at least, no more concerned than you are on any other day.
To put it in perspective, if the Dow closes more than 100 points lower, which it appears likely to do, it will mark the eighth day in a row that it has changed by a triple-digit figure. Volatility is the name of the game lately, and it's one more reason that you're better off not opening your brokerage account on a daily or even weekly basis.
That being said, let's take a look at why the market is tanking.
For starters, there were a handful of economic reports that paint a conflicting view of the still-incipient economic recovery. The best news came courtesy of the National Association of Realtors, which reported that existing-home sales rose by 4.8% last month compared to April and 12.9% over May of 2012. However, the good news was tempered: As the association's chief economist observed, "Home price growth is too fast, and only additional supply from new homebuilding can moderate future price growth."
On the other hand, the government released figures that further revealed the ongoing struggles in the labor market. According to the Department of Labor, the number of people filing for unemployment benefits rose last week by 18,000, or 5%, from the preceding week. While this is only an estimate and it covers a short period of time, it's nevertheless discouraging in light of the 7.6% unemployment rate that's afflicting the economy.
Beyond these, though, there's little doubt that the markets are being roiled by one thing and one thing only: the Federal Reserve. Following the conclusion of the bank's quarterly monetary-policy meeting yesterday, Fed Chairman Ben Bernanke continued to intimate that the bank would draw down on its support for the economy if the unemployment situation continues to improve and consumer prices remain stable.
Although this wasn't really news -- we've known that QE3 wasn't meant to continue forever since it was initiated last September -- there's clearly a growing sense of concern among market participants that the end is near. I personally don't have any insight into this, other than to say that the economic fundamentals don't appear to be reaching the level where the Fed, under its current policy guidance, would make a move. In other words, it looks a lot more like intentional posturing aimed at driving down asset prices from their recent, and arguably inflated, highs.
But whether or not this is the case, stocks have fallen hard today.
In terms of individual companies, shares of Disney are leading the Dow lower, off by 3.7% in midafternoon trading. The entertainment company is suffering alongside its blue-chip brethren for the reasons discussed above, but it's also feeling the effects of an analyst downgrade. As my colleague Anders Bylund noted, the influential investment bank Goldman Sachs cut its rating on Disney to "neutral" from "conviction buy," pointing to increased competition for Disney's lucrative ESPN division and slower earnings growth owing to jumped-up costs to acquire broadcast deals for sporting events.
Alternatively, one of the best-performing components on the Dow is American Express , which is off by a relatively modest 1.6%. There are any number of ways to interpret this, but I'd guess that it has something to do with the anticipated direction of long-term interest rates. Financial companies like American Express look to the spread between long-term and short-term rates for much of their profits. With the purported end of QE3 in sight (though, as I said above, I think this may be a premature conclusion), long-term rates have already started to climb, expanding this profitable spread. This is why banks and other lenders could theoretically move countercyclically over the next few quarters.
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The article Why the Dow Is Plummeting -- and Why You Shouldn't Care originally appeared on Fool.com.John Maxfield has no position in any stocks mentioned. The Motley Fool recommends American Express and Walt Disney. The Motley Fool owns shares of Walt Disney. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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