Why the Dow Plunged 200 Points

Although we don't believe in timing the market or panicking over daily movements, we do like to keep an eye on market changes -- just in case they're material to our investing thesis.

The Dow Jones Industrial Average (DJINDICES: ^DJI  ) plunged 252 points, to 15,445, as of 1:30 p.m. EST after the Institute for Supply Management's Purchasing Managers Index came in far below expectations. The S&P 500 (SNPINDEX: ^GSPC  ) was down 34 points to 1,748.

There were two U.S. economic releases today and a notable economic release in China.

Report

Period

Result

Previous

Markit U.S. Purchasing Managers Index

January

53.7

55.0

U.S. ISM PMI

January

51.3%

56.5%

China PMI

January

50.5%

51%

Over the weekend China reported its official purchasing managers index for January which showed activity continued to expand, but at a slower rate than in December. This is in contrast to HSBC's China PMI from Thursday, which showed activity in China actually declined in January compared to December. Whether activity declined slightly or slowed to a little more than no growth, the fact is that China's economic growth is slowing; that is bad news for the rest of the world given the massive size of the Chinese market.

The big surprise today was the steep drop in the ISM's PMI. The drop was led by a 13-point fall in ISM's new orders index, indicating new orders dropped sharply month over month. Poor weather was cited as one of the main causes of the steep drop; weather also likely affected hiring, with the ISM's employment index falling 3.5 points to 52.3%. We will find out more on the U.S. jobs situation later this week, with ADP's private sector employment report due on Wednesday and the Department of Labor's nonfarm payrolls report out on Friday.

Twenty-eight of 30 Dow stocks are down for the day, with wireless giants AT&T (NYSE: T  ) and Verizon (NYSE: VZ  ) the biggest percentage losers. AT&T over the weekend announced a new deal aimed at retaining its customers and stealing some from Verizon. T-Mobile started a price war in 2013 with the major wireless companies, and every new shot fired has investors worried the situation will keep getting worse.

Both AT&T and Verizon are down roughly 3%, but because of the Dow's structure as a price-weighted index and their small stock prices, their drops are not having that much of an effect on the blue-chip index. The stock pulling the Dow down most is its third-largest component, IBM (NYSE: IBM  ) , which is down 2% ($3.51) to $173.17 its large stock price is having a greater effect on the Dow than AT&T and Verizon combined.

Stocks have looked overvalued for some time, and as a whole still do. That said, predicting where the broad market will go in the short term is a game for fools (with a lowercase "F"). Stocks can always get more overvalued. When things get frothy, it's worthwhile to build up some cash on the side for when prices inevitably fall.

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