Commentary Magazine

The Stock Market Crash That Wasn’t

AP Photo/Mark Lennihan

No, it’s not a crash. It’s not even a correction, at least not yet.

The stock market fell 1,175.21 points on the Dow yesterday to 24,345.75. That is down 2,371 points from its January 26 record close. Still, to be officially in a correction, the market would have to be down 10 percent from its high, or 2661 points.

To be sure, yesterday afternoon the market briefly swooned big time. At 3:00 PM it was at 24,742. Ten minutes later it was at 23,923, down an awesome 819 points in ten minutes flat. Six minutes later, it was back up to 24,727. It then declined at a more leisurely pace for the rest of the session. Numbers like that give even hardened traders palpitations.

While it’s too early to tell, this appears to be more an artifact of the extraordinary run-up in January, when the market roared through two 1,000-point marks in a single month. Markets that go up that fast usually come back down just as fast. So while it’s down 8.5 percent from its record close, it’s down only 1.9 percent on the year. It is still way, way above where it was a year ago. The media has been making much of the fact that yesterday’s drop was “the biggest one-day drop in the history of the Dow.” That’s true, but so what? It’s the percentage drop, not the point drop; that matters. In 1987 the Dow dropped 600 points in one day, a percentage decline of over 22 percent. Yesterday’s drop was 4.6 percent, which is not even in the same league.

The underlying economy has seen increased growth over the last three quarters, 200,000 new jobs last month, unemployment at 4.1 percent, and indications that wages might be rising at a faster pace after years of languishing. The new tax law should result in increased consumer spending and corporate investment, the two big engines of economic growth. Many economists see the possibility of 4 percent growth this quarter, a pace unseen for more than a decade.

And while interest rates have been rising, they have only been returning to more normal levels after the Fed kept them unnaturally low for years. That is actually a sign of a recovering economy. Higher interest rates will, however, increase the attraction of investments other than stocks, such as bonds. The extraordinary surge in the stock market from its March 2009, low of a little over 7,000 on the Dow–a run-up of almost 400 percent in nine years–is to some extent a product of those artificially low-interest rates that made the stock market the only game in town for investors.

So while the economy shows every sign of increasing health, I wouldn’t be surprised if we have seen the high on the Dow for the year. But that’s a long way from a crash. Overseas markets are down sharply, reacting to Wall Street, and Wall Street is likely to react to that reaction, at least at the opening. As Bette Davis famously said in All About Eve, “Fasten your seatbelts, it’s going to be a bumpy night.”

That, of course, is precisely why President Trump should not have been touting the stock market rise as one of his administration’s accomplishments. The stock market, unlike the underlying economy, is subject to the whims of human passion in the short term.

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