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Dow Jones and S&P 500: Will Wild Swings Continue?


Sep. 4 2020, Updated 6:56 a.m. ET

  • US stock markets have been quite volatile during the last few weeks. The Dow Jones Index and the S&P 500 have seen wild price movements as investors price in coronavirus risks and policy support.
  • From the worst fall since the 2008–2009 financial crisis to the second-best day ever, the Dow Jones Industrial Average Index has seen it all during the last three weeks.
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Dow Jones futures today

Dow Jones futures are pointing to a drop today. On Monday, US stock markets surged. The Dow Jones Index (NYSEARCA:DIA) and the S&P 500 (NYSEARCA:SPY) each gained 4.9% and recouped some of their Monday losses. Incidentally, on Monday, US stock markets had their worst day since the 2008–2009 financial crisis. The Dow Jones and the S&P 500 are still in the correction zone, which means that they have fallen more than 10% from their recent highs. On Monday, it seemed like the longest bull run in history had run its course. Although US stock markets bounced back on Tuesday, the optimism was short-lived. The Dow Jones futures point to a weak opening today.

US stock markets and volatility

Stock market investors aren’t strangers to volatility. Investors who aren’t comfortable with stock market volatility shouldn’t be in the market in the first place. Meanwhile, the CBOE Volatility Index has hit its highest level since 2008. Earlier this month, the Dow Jones had its second-best day ever after Joe Biden scored significant victories during Super Tuesday. However, on Monday, the Dow Jones had its worst fall since the 2008 financial crisis.

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Dow Jones has whipsawed

Between February 24 and March 10, the Dow Jones gained or lost more than 1,000 points six times. In nine instances, the price movement has been more than 500 points. There was a total of 12 trading days during that time frame. To put that in perspective, last year, the Dow Jones saw a price action of more than 500 points on only six occasions. In the previous ten years, the Dow has risen or fallen by 1,000 points daily only three times if we exclude this year’s price movement. To be fair, the absolute price action might not portray the correct picture. Instead, we should look at the percentage price movement. However, even considering the percentage price movement, stock markets have been quite volatile over the last three weeks.

What’s driving the indexes?

Investors have been reassessing coronavirus risks and possible policy support from central banks and federal governments on an almost daily basis. One day, it seems like the coronavirus isn’t a significant threat to markets. However, the optimism dies the next day after the Dow Jones crashes. In my view, we still haven’t got to the bottom of the coronavirus sell-off and volatility will stay longer. China had the resources and political will to quarantine millions of people. Not many countries globally have the resources or the iron fist to enforce the strict rules that helped China contain the coronavirus.

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Warren Buffett on stock markets

With so much uncertainty about the coronavirus, investing in stock markets has been like betting at a casino. For clarity, we can look at one of Benjamin Graham’s famous quotes that says, “In the short run, the market is a voting machine, but in the long run, it is a weighing machine.” However, Warren Buffett, who follows Graham’s value investing principles, has been sitting on a record amount of cash. While Buffett doesn’t think that the coronavirus will have a long-term impact, he also pointed to “excesses” in a recent interview.

Stock market valuations

Buffett especially pointed to the high US fiscal deficit despite strong economic growth and negative interest rates in some countries. From a valuation standpoint, the stock market valuations were elevated earlier this year. With the crash in the Dow Jones, valuations have fallen from an absolute perspective. However, disruptions due to the coronavirus might also impact corporate earnings. From a PEG ratio standpoint, markets still don’t look very attractive.


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