Start the conversation
Yesterday, the Dow Jones Industrial Average recorded its largest single-day point drop ever when it closed down 1,175 points. Combine that with Friday's losses, and the total loss was roughly 6% in two days.
The sudden drop has many investors worried that the 2018 stock sell-off is a sign of worse things to come.
First, let's make one thing clear: There is no reason to panic over the market's recent pullback.
Over the last 12 months, the Dow has tacked on 6,000 points in just the last year, representing a gain of nearly 33%. After this week's pullback, the Dow is back to where it was trading in December 2017.
In other words, the current drop has not even hit "correction" territory yet, which is a 10% drop from market highs.
While the markets could see another day or two of declines, Money Morning Chief Investment Strategist Keith Fitz-Gerald says that panicking is the worst mistake you can make right now.
The 2018 Stock Sell-Off Does Not Mean the Fundamentals Have Changed
While Monday's 1,175 point for the Dow was drastic, the fall had little to do with the economic fundamentals underlying the market's historic run.
Keith points out that much of Monday's drop was the result of automated trading systems.
The First Step on Your Road to Millions Starts Here: All you need is a computer or smartphone and just 10 minutes of "work" to potentially put $1 million in your bank account faster than you ever dreamed. Read more…
"Markets were selling off in relatively orderly fashion until the last hour, when computers took over and sent the major averages into freefall," he says.
"This is usually consistent with risk arbitrage programs reaching pre-programmed limits or some complex balancing between positions. Either way, it's so fast a human can't keep up… or stop it."
The market's sudden fall wasn't due to a significant shift in investor optimism. Instead, a sudden increase in volatility created extra selling from trading programs, sending prices down.
Additionally, last week, former U.S. Federal Reserve Chair Janet Yellen noted in her final meeting that inflation was beginning to rise, announcing that average hourly earnings rose 2.9% in January.
Keith says that Yellen's announcement "prompted 'position' traders to reassess the Fed's next move as more hawkish and to get ahead of that by selling, which added significantly to the computerized pressure already building."
In other words, the 2018 stock sell-off was mainly driven by catalysts that have little to do with the strong economic health driving the bull market's run.
As a result, this isn't the "stock market crash" many are fearing. But investors are still wondering how long it's going to last.
Here's what we expect…