Today, sellers piled-into Friday’s already depressed market, sending stocks down a great deal further in late afternoon. The Dow Jones Industrial Average fell 3.1% on the day, to close at 16,459.70, or just a little more than ten percent below its recent high. The broader-based Standard and Poor’s 500 fell below the psychological 2,000 level, closing down 3.1%, at 1,970.89. But, that was just a little more than seven percent below its recent record high. And the tech-heavy NASDAQ closed down by 3.5%, at 4,706.04, and nearly ten percent below its recent high.
The importance of a decline of ten percent, at least in market parlance, is that a drop of that magnitude is referred to as a “correction”. Remember that the stock market has many participants. Small investors and large, those with market savvy and those without, and many, many types of institutional investors. The point is: there are always buyers and sellers; but, just at what price?
In many developing markets, oftentimes ones with less financial sophistication, the decline has been much more substantial. China for instance, had had a significant market bubble earlier this year, with the Shanghai Composite Index (its major Mainland market) having appreciated by over 150%, at the time Stock valuations, the price-to-earnings ratio (i.e. how many dollars you pay for one dollar of earnings) was trading around 70. For comparison, on the major U. S. indices, the P/E traditionally trades in the teens, and is now even somewhat lower–following the correction.
Now, going back to those many potential buyers and sellers, sometimes it takes a correction to encourage those wanting to cash-in their assets, or at least a portion of them, to do so. Likewise, lower prices often encourage potential buyers to step-in and support the lower prices. There was one other thought that I had when I heard that sellers were piling-on, late on a Friday afternoon. Was the late afternoon fire sale a “Capitulation”?
Capitulation is more of a theoretical concept–and quite difficult to identify. It is thought of as a point when everyone who had considered selling their investments, has done so. And, if that turns out to actually be the case, then the market would be expected to have reached its bottom and, at some point, begin to build upward support from that point.
So, if you’re feeling frazzled, take the weekend off. We’ll start this back-up again on Monday.
NOTE: This week has brought back memories of how much fun it was (not!) to be a financial advisor during the 18 month Great Recession, when swings in the Dow of some 1,000 to 1,200 were quite common. For instance, one day I left the office at 3:30 PM and noticed that the Dow was trading up by 250 points. At least some good news for a change! When I checked that night, the Dow had posted a 300 point loss when it closed at 4:00 PM.. A 550 point reversal in just 30 minutes. I do not, however, expect a reoccurrence.