In this post I’ll be talking about what happened in today’s stock market with the 878 point drop in the Dow, the reasons I believe that caused it, as well as what it means going forward.
This post is geared more for the people that are familiar with the stock market already, the Nasdaq, and the S & P 500 stocks. For the younger crowd or the people not familiar with our stock market, I will be writing other posts that will talk basics about what the stock market is, what a stock is, what an option is, how to buy and sell stocks and options, the strategies…all in later posts.
Some may say that the eight hundred and seventy eight point drop in the Dow Jones today is not that big of a deal. That in the past, we’ve had several drops in the Dow that have represented much more significant drops which negatively impacted our economy and the lives of millions. After all, the Dow Jones Industrial stocks represent a huge part of our economy in that these 30 are some of the biggest companies in our country. For reference, here are the 30 companies that make up the Dow Jones Industrial.
- Amazon
- Amgen Incorporated
- Salesforce Incorporated
- Caterpillar Incorporated
- Boeing Company
- American Express Company
- 3M Company
- McDonald’s Corporation
- JP Morgan Chase and Company
- Johnson and Johnson
- International Business Machines
- Home Depot Incorporated
- Goldman Sachs Group
- Walt Disney Company
- Chevron Corporation
- Cisco Systems
- NVIDIA Corporation
- Microsoft Corporation
- Honeywell International
- United Health Care Group
- Travelers Company
- Procter and Gamble
- Nike
- Merck and Company
- Apple Inc
- Sherwin Williams Company
- Coca Cola Company
- Visa Incorporated
- Walmart Incorporated
- Verizon Communications Incorporated
I do agree with some that say that today’s drop does not carry some of the significance as some of our more impactful drops such as the 22.6% drop on October 19th, 1987 or the 2020 Covid drop on March 16th 2020 at 12.9% or the 2008 Global Financial crisis on October 28th, 2008 where the Dow dropped 11%. Today’s 1.90% drop surely doesn’t compare to these…but I don’t believe this is the total/whole story.
Today’s market was an average day where the market was up a couple hundred points by 8am. However, then came news that we are putting on an additional 100 % tariff on China’s trade imports into our country. That immediately made almost all stocks drop with some (Broadcom, SOFI) dropping 4-5%. The semiconductor stocks (Advanced Micro Devices, Microsoft, Google, Broadcom) all took big losses as did the banks (JP Morgan Chase, Bank of America, Wells Fargo, Morgan Stanley).
Now comes the big question? Is this just simply a one off occurrence or does this have other ramifications where this can lead to other negative follow ups? First, we have to take a look at the history of the last three to four months. If we take a look at the last three to 4 months, we’ll see that all stocks have gone directly up to where everything becomes what they call “overbought”. This means that these stocks are being bought so much that they do not justify the actual earnings of these companies. What has caused the stocks to be bought so much rather than sold? It is the economy. There are many factors of the economy that determine how well the stock market performs (goes up or down). Rather than getting into this too deep, the main factors are always the same… Do the majority of people have secure housing and do majority of people have a secure job? So far the answers to those two questions are a resounding “yes”. What this allows people to do Is to budget their income so that they can plan for their mortgage cost, their food cost, and then invest any extra income into purchasing stocks. For many people this comes down to having confidence that they are going to maintain their job and maintain their housing and be able to pay off all costs and that the the stocks that they are purchasing will continue to go up because other people are buying more than selling as well.
What does all of this mean going forward? What we need to watch out for is whether or not jobs are going to be maintained or are layoffs going to begin in big numbers? Next, what will the housing market begin to do? If the job market begins to gain in unemployment, then people being able to have extra cash called “disposable income” and spending it on these companies will dwindle. This will drop the earnings (profits) of these big companies meaning the stock prices will drop as selling of these shares of these stocks will increase.
If people do not lose their jobs in spite of the tariffs and other policies, then there is no reason to believe that the companies will not continue to grow and have good earnings that will support their stock prices.
Finally: what will the tariffs do? We know these tariffs companies have to pay to import their products will pass these on to us consumers. What does this mean? It means they will increase the prices of their products in order to pay for these tariffs (taxes). Now comes the final question? Will people continue to buy these same products even though the prices of these same products are increasing due to the tariffs? If they do, then the earnings of these companies will continue to grow and their stock will continue to be bought. This will mean there is more demand to buy rather than sell the stocks…thereby increasing the stock prices. If the consumers do not due to increased prices, then the earnings of the companies will decrease, people will see there is not as much demand for their products, and demand to buy will become less meaning the stock prices will fall.