It’s been a bumpy road for the stock market in October.
The first couple days were positive, including a new record high on October 3 for the Dow Jones industrial average (or Dow), an index that tracks 30 large U.S. stocks and is often used as a gauge for the overall market. But stocks have slid in the days since. On October 10, the Dow sank more than 830 points, or about 3.15 percent. The Standard & Poor’s 500-stock index, which tracks 500 of the largest U.S. companies, fell about 95 points, or nearly 3.3 percent. The next day, the Dow and S&P 500 were each down about 2 percent.
Those may seem like pretty dramatic drops, until you take a step back. Both the Dow and S&P 500 are still positive for the year. The recent slump left it about where it was in July.
And this isn't the first time stocks have slumped in 2018. Back on February 5, we saw a single-day drop of 1,175 points! The next day, however, stocks were back on the upswing and had fully recovered by the end of the month.
(Watch CEO Noah Kerner's take on the markets in the video below.)
So, what’s going on this week?
As is often the case, a number of factors are weighing on the market. Here’s a look at three big ones:
1. Interest rates are rising.
Interest rates have been inching up since late 2015, but the pace has been accelerating. In late September, the Federal Reserve (our central bank) raised the so-called federal funds rate to 2.25. That’s the rate at which banks lend to each other overnight, which sounds like no big deal—except that they then turn around and raise the interest rates charged on our credit card balances and other loans with variable interest.
That, of course, means more expensive debt—for companies and consumers like us. Mortgage rates have also been climbing, which has led to declining home sales that, in turn, have affected homebuilder stocks. (One good reason to invest in a diverse mix of stocks: When some are down, others should still be up.)
Yields on bonds have also been climbing. That mean that bonds are offering more substantial payouts these days to investors. Couple that with the relative lower risk, and some investors may be tempted away from stocks.
2. Tech stocks have taken a hit.
Formerly high-flying stocks—such as Facebook, Apple, Amazon.com, Netflix and Google-parent Alphabet (i.e., FAANG stocks)—did much of the heavy lifting of the long-running bull market. Now their stumbling is dragging the market down. In fact, the tech-focused Nasdaq index had a particularly bad day on October 10, dropping about 315 points, or 4 percent. On October 11, it closed down 1.25 percent.
Data leaks at Amazon are contributing to its sinking share price. Apparently, at least one Amazon employee has taken bribes from third-party sellers to share customers’ email addresses. Because the e-commerce giant relies so heavily on third-party sellers, there are concerns these troubles may have an impact on the company’s bottom line.
3. Concerns about the global economy are growing.
The International Monetary Fund (IMF) just released its latest Global Financial Stability Report, in which it cautioned that the ongoing trade war and other geopolitical tensions could ultimately push down stock prices.
The agency also announced it’s lowering its growth expectations for the global economy to 3.7 percent this year and next year, down 0.2 percentage points from its April forecast. Its expectations for the U.S. specifically are holding steady at 2.9 percent growth for this year, but slow to 2.5 percent for 2019.
A bright spot: The report does note that the overall financial system is still stronger than it was before the financial crisis.
What can I do about all of this?
Sit tight. Even if our long-running bull market is starting to run out of steam, the long-term direction of the stock market has historically been up. Plus, a wise investing strategy already has baked into it the expectation that there will be down periods as well as up. (It’s worth noting that, over history, the stock market upturns have been longer and larger than the downturns.)
As long as you continue to focus on the long term and stick to a well-diversified portfolio you should be prepared to weather these rocky months—and and stay on the path to achieving your financial goals.
This post was updated on October 11.
October 10, 2018