EVERYONE CHILL

How to make sense of the S&P 500 drop of over 1%

Even though the bears gave the tiniest of roars today (Jan. 30), sending the Standard & Poor’s 500 index down 1% and the Dow Jones Industrials index down 1.4%, this kind of one-day drop is far from a crash or crisis.

As we’ve written, the US stock market is overvalued. There’s valid concern that a correction lies ahead, or worse, that a melt-up will lead to a bubble burst. But while the market has been up a lot in the past year, and appears to be accelerating, it doesn’t seem that we’ve hit that big correction quite yet.

So what happened today?

No one knows for sure. But here are some likely factors:

  • The S&P was down 1%. To those with short financial memories, that seems like a big deal—the S&P hasn’t been down more than 0.5% two days in a row in almost a year. (But historically? This is not a big deal.)
  • Jeff Bezos, Warren Buffett, and Jamie Dimon announced they might want to destroy the health care industry. Their plans are quite unclear, but what is clear is that the mere existence of those plans will put pressure on health care stocks. The health care sector of the S&P was down 2% on the day.
  • Tech-sector earnings will likely be messy. Apple’s earnings are a gamble based on the production-cut rumors, Amazon never does well in its fourth-quarter earnings, and Facebook’s will likely be a dud, as Mark Zuckerberg tries to explain what meaningful means. Maybe they all do well, maybe they don’t. But there seems to be more uncertainty this quarter.
  • Few people truly understand volatility, but they generally know that big moves in the VIX Index are risky. They also know that lower numbers are better and have felt safe as the VIX has been below 10 for a long time. The VIX has gone up by 32% in the past two days and is now at 15.
  • Donald Trump’s State of the Union address today and Federal Reserve chair Janet Yellen’s remarks tomorrow add some uncertainty. The possibility for big policy changes adds risk.
  • There are an increasing number of macro concerns, such as rising inflation and the dollar dropping. Although none of those is having big effects on the market yet, there’s an increased risk of surprises.

None of that feels like a crisis. But it’s clear that today, none of it made anyone reach for the buy button, either.

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