Why Do Stock Prices Jump Around So Much?


If you've been checking your portfolio regularly, you may have noticed your balance has fluctuated over the past month. 

After climbing to new highs in January, both the Dow Jones industrial average (which tracks 30 large U.S. stocks) and the Standard & Poor's 500-stock index lost more than 10 percent of their value in early February. While they've recovered a little since, it's been a bumpy ride.

So, why all the ups and downs?

Actually, such fluctuations are normal—if a little exaggerated in the last few weeks. In large part, they happen because of us, or rather, millions of investors like us. Public demand dictates price movements. And en masse, we are very fickle people.

Our opinions about a particular company’s stock—or the stock market, generally—can change based on any of a million different things, from company revenue forecasts to new employment data. When big names in finance speak publicly, their words can also have an immediate effect on the stock market, as investors try to figure out the implications.

When the indexes dropped on March 1, analysts cited testimony by Jerome Powell, the new Chairman of the Federal Reserve, in which he implied the central bank might raise interest rates more than initially expected this year.

Higher rates make debt more expensive for companies (and for us). It also means new bonds issued could offer higher interest rates, leading some investors to move more money into bonds from stocks, which can have a deflating effect on the stock market.

President Donald Trump also announced new steel and aluminum tariffs on Thursday, sparking fears of a trade war, and set off an almost immediate drop in the major stock indexes (though they later rebounded).

The bottom line: Such reactions (or overreactions) are not unusual. Day-to-day volatility is part of the normal market cycle. Not getting caught up in the daily churning of the market is actually one of the best things you can do as an investor.

Remember that over the long term, the odds are in our favor. Over the past 90 years, the S&P 500-stock index has returned 9.8 percent a year, on average. And that includes big bear-market losses, like when the S&P 500 dropped 51.9 percent between October 2007 and November 2008 before rebounding. Despite such big occasional falls, stocks historically have risen significantly over the long run. So your best bet is to stick with them and give your portfolio a chance to recover.