Yesterday, July 26th, the stock market as measured by the Dow Jones Industrial Average (DJIA) closed down 311 points. It was down during the day’s trading by more than 450 points.
This is big news and should be reported. However, it is wise to keep a steady perspective on it. Many major media outlets tend to overuse verbs and adjectives such as “plunge,” “crash,” meltdown,” and “catastrophic.” How many flashbacks to the ever popular “crash” of the 1920s have already been flashed about? Additionally, mainstream media salivates over anything they can use to further discredit President Bush and his administration; a market downturn like this gives them more ammunition to load into their blank-firing pistols.
Let’s apply some perspective. Since the close of 2006, the DJIA has advanced to a closing high of 14,000.41, an increase of 12.3%. From its closing low for the year (3/5/2007) to its closing high to date (7/19/2007), the index has increased 16.2%. From its highest closing to yesterday’s close, the DJIA is down only 3.7%. This current downturn has not even met the typical criteria for a market correction! (“A market correction is sometimes defined as a drop of at least 10%, but not more than 20%...” - http://en.wikipedia.org/wiki/Bull_market) In fact, the DJIA measured from its 2006 close to yesterday’s close puts the average up 8.1%.
I think that the markets were looking for any reason to do some shaking out, and they have found some of those reasons in credit market, global liquidity, and housing market worries. All of these issues are thus far cyclical in nature. While there remains some downside potential, I think that many investors are already poised for “bargain hunting” good stocks and will begin softening the downside blow. For those who are dollar cost averaging into mutual funds or other investments for the long term, this is not a bad time at all.
This is big news and should be reported. However, it is wise to keep a steady perspective on it. Many major media outlets tend to overuse verbs and adjectives such as “plunge,” “crash,” meltdown,” and “catastrophic.” How many flashbacks to the ever popular “crash” of the 1920s have already been flashed about? Additionally, mainstream media salivates over anything they can use to further discredit President Bush and his administration; a market downturn like this gives them more ammunition to load into their blank-firing pistols.
Let’s apply some perspective. Since the close of 2006, the DJIA has advanced to a closing high of 14,000.41, an increase of 12.3%. From its closing low for the year (3/5/2007) to its closing high to date (7/19/2007), the index has increased 16.2%. From its highest closing to yesterday’s close, the DJIA is down only 3.7%. This current downturn has not even met the typical criteria for a market correction! (“A market correction is sometimes defined as a drop of at least 10%, but not more than 20%...” - http://en.wikipedia.org/wiki/Bull_market) In fact, the DJIA measured from its 2006 close to yesterday’s close puts the average up 8.1%.
I think that the markets were looking for any reason to do some shaking out, and they have found some of those reasons in credit market, global liquidity, and housing market worries. All of these issues are thus far cyclical in nature. While there remains some downside potential, I think that many investors are already poised for “bargain hunting” good stocks and will begin softening the downside blow. For those who are dollar cost averaging into mutual funds or other investments for the long term, this is not a bad time at all.
(image: intraday candlestick chart of DJIA for 7/26/2007)
