Headline: Largest One Day Drop Ever! PMA: So What!
With its 666 point decline on Friday, February 2nd, and then it’s 1,175 point drop on Monday, the Dow Jones Industrial Average reminded us that, yes, markets do go down, sometimes dramatically so. The delivery of this reminder may have been painful, but it’s a reminder that we all probably needed. Even though the past eight years have made it easy to get used to, markets do not simply go up in a straight line.
But why did the market drop like this at this point in time? Was it a rational reaction to the rise in interest rates and expected inflation? But if so, why wasn’t this already priced into the market? Why did the market appear to be shocked by this? Or, if it wasn’t rational, was it proof of one of the tenets of behavioral finance – that markets are often a reflection of the irrationality of human beings? Or, was it a rational re-pricing of the market in response to new data? Or was it some mysterious confluence of algorithms and hedge funds and computer problems?