The stock market suffered another big drop on Wednesday, with economic data coming to the forefront of investors' minds. News that consumer prices rose 0.8% in April stoked fears of uncontrolled inflation that could prompt the Federal Reserve to take drastic action that would endanger the economic recovery. That sent the Dow Jones Industrial Average (^DJI +0.50%), S&P 500 (^GSPC +0.83%), and Nasdaq Composite (^IXIC +1.38%) all down in unison.
As nasty as today's drop looked, though, the reality isn't that bad. Below, we'll look more closely at the inflation numbers and why the market's drop might well have been an overhyped reaction to conditions that are unlikely to persist.
How the market fared on Wednesday
Stock markets lost ground gradually throughout the day and closed at their worst levels of the session. Losses for small-cap stocks were even steeper, with the Russell 2000 index falling more than 3%.
|
Index |
Percentage Change (Decline) |
Point Change |
|---|---|---|
|
Dow |
(1.99%) |
(682) |
|
S&P 500 |
(2.14%) |
(89) |
|
Nasdaq Composite |
(2.67%) |
(358) |
Data source: Yahoo! Finance.
Dismissing the hyperbole
It's easy to portray Wednesday's market drop as being a big deal. The S&P's drop just missed the cut as one of the 20 worst days in the index's history. Hearing about a 682-point plunge in the Dow makes for scary headlines.
But the huge gains in all of the major market benchmarks make point-based moves increasingly misleading. Put another way, a 700-point move for the Dow just doesn't mean what it used to mean. Daily moves of 1%, 2%, or even 3% simply aren't all that uncommon when you look back at stock market history, and if anything, the markets have been less volatile over the past decade than they were back when index levels were much lower.
Moreover, markets aren't that far off their all-time record highs. The Dow closed just 3% below its highs, and the S&P is just 4% under its record. The Nasdaq has taken a bigger hit, but even it's down just 8%. Indexes reached those levels for the first time ever just earlier this year, leaving intact a huge portion of their past gains.
Image source: Getty Images.
Don't panic about inflation
Moreover, some are overreacting to the inflation news. It's true that the jump was the largest in more than a decade. But the month featured some unusual aspects:
- Prices of used cars and trucks jumped 10%, as disruptions to new-car sales from semiconductor chip shortages boosted demand for alternative transportation.
- Travel-related costs soared. "Lodging away from home" saw prices rise 7.6%, while airline fares skyrocketed 10.2%. Car and truck rental costs jumped 16.2%.
That's not to say the news was all so easily dismissed. Food costs were up 0.4%, with costs of dining out jumping 3.8%. Inflation numbers might have been higher had it not been for a short lull in rising gasoline prices, which helped the energy index fall 0.1% during April.
The economy has seen unprecedented disruptions, and it's natural that prices are going to go through some perturbations to readjust to conditions slowly heading back toward normal. It's likely that many of these temporary jumps will reverse themselves once these short-term glitches work their way through the system.
It's hard to endure stock market drops, but it's easier when you know most investors are selling for the wrong reasons. If you own shares of strong companies, their true value will win out in the end.
