US stock markets seesawed on Tuesday, finally closing in the red despite a rally early in the day. The DOW Jones Industrial Average was up by 441 points in the morning recovering from a catastrophic drop on Monday, but quickly took a turn for the worst and fell by 1.3%. Standard & Poor's 500 index dropped by 1.4% and the Nasdaq composite dropped 0.4%. The losses left investors reeling with panic once again.
The drop is linked back to Chinese investors desperately selling off shares for a second day as the Shanghai composite continues to drop.
Market watchers and investors were sent into panic mode Monday morning when they awoke to the DOW Jones Industrial Average having plunged a record-breaking 1,089 points, eerily reminiscent to the 2008 crash when the number dropped 1,018.77 points.
While the U.S. stock market has mostly bounced back from the plummeting scare to only being down by 586 points by the afternoon, that doesn’t mean some financial woes weren’t already set and damage control being done.
Here’s the breakdown of what happened and how it could affect you.
Today’s crash largely relates back to China, the second-biggest economy in the world. China’s slump initially started this summer when the government nervously tried pushing more money into the market and devalued its currency, the yuan, leading investors to desperately sell off their shares pushing the crisis over the edge and culminating into what is being dubbed as “Black Monday.” Enough shares were sold to drop the value of China's Shanghai Composite down more than 8%.
The drop had a financial ripple effect across international commodities and currencies. The Russian currency dropped to its lowest point in seven months and Japan, UK, AND Europe’s stock markets were all down past 4%.
Over here in the U.S., the drop in the DOW Jones is likely tied to the market correcting itself as Mic notes. Corrections happen when the stock market has been doing consistently well for a long period of time, and the U.S. stock market has been riding a wave for the past six years.
“A correction is a decline or downward movement of a stock, or a bond, or a commodity or market index.
The amount of the decline is at least 10 percent and a true correction exceeds that amount.
In short, corrections are price declines that stop an upward trend.”
The correction inevitably happens when investors get a little too eager and buy all at once, or get a little too worried and hurriedly sell off.
According to CNBC:
“When stock or bond prices go up, it may seem like there's no end to how high they can go. When this happens, stocks or bonds become 'overbought.' That means some investors will try to buy into the rise of stock prices with the hope of making profits before a downward trend begins.
But as they do buy in, the investors who bought earlier—helping to push the stock or bond price up—will consider selling when they think the price is near a peak…
...And sometimes, investors will simply take profits as the market heats up. In either case, the selling pressure drives prices down."
How does this affect you?
While it is still a little too early to tell, some predictions are being made.
In good news, oil tanked as well which could lead to a drop in gas prices. Oil which has been steadily dropping reached a low of $40 per barrel, which is significantly cheap. But with fallen gas prices comes a drop in energy stocks which spells bad news for Americans who overwhelmingly have their retirement portfolios and state economies dependent on oil.
And as WTHITV points out, exports could be drastically affected which could lead to a drop in job creation.
Interest rates may also be affected by the crash. Instead of hiking interest rates as expected, the US Federal Reserve could stop the intended action and instead ease monetary policy as former US Treasury secretary Larry Summers predicts.
Yet the plunge isn’t cause for high alert yet. This may mean decline but it still nowhere near the crash of 2008 that spurred the Great Recession.
The stock market plunge, in perspective. (10-year chart.) pic.twitter.com/M30thHhkrv— Justin Wolfers (@JustinWolfers) August 24, 2015
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