The U.S. stock market had a rough Monday.
The Dow Jones industrial average plunged 1,175 points, or 4.6 per cent, erasing its gains for the year. The drop was its biggest in terms of points, but it had a larger percentage drop as recently in 2011. The Dow currently sits at 24,345.
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The Standard & Poor’s 500, the benchmark for many index funds, fell 113 points, or 4.1 per cent, to 2,648. The Nasdaq fell 273, or 3.8 per cent, to 6,967.
What’s causing the decline?
The heavy losses deepened a slump that began on Friday as investors worried that creeping signs of higher inflation and interest rates could derail the market’s record-setting rally.
Lisa Kramer, a professor at the University of Toronto’s Rotman School of Management, told Global News that there may be other factors at play.
“It can be a variety of things, interest rates, political uncertainty that’s going on in the U.S., including the budget showdown,” Kramer said.
“And then there can also be sentiment factors — just like the way investors are feeling, partly driving these kinds of fundamental uncertainties.”
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Many market analysts have indicated that after months of gains, a correction was expected. A market correction is usually defined as a drop of more than 10 per cent from recent highs.
Kramer explained that there’s no way of knowing the length or the severity of the downturn, but she added that it’s important not to get too hung up on numbers at this time.
“We get hung up on round numbers, so there’s nothing magical about the number 25,000. These are arbitrary numbers. The more often we look at these numbers, the more volatile markets are going to appear to be.”
What does this mean for the U.S. and Canadian economy?
While declines often lead to anxiety, an economist told the Associated Press that the American economy is actually doing quite well.
“What we’re seeing right now is an economy overall that is doing quite well and has strong fundamentals,” said Gregory Daco, chief U.S. economist at Oxford Economics. “The economy remains on track to expand at a fairly solid pace, and along with that comes inflation.”
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Daco explained that the U.S. job market is in great shape, consumers are spending, and household debt seems to be in control.
Kramer said Canada is in a similar situation, adding that the country has a “very strong” resource-based economy.
“We can perhaps withstand this negative sentiment more so than the U.S. can,” she said. “That isn’t to say that either market is going to crash, but even if there is a relatively big downturn, there’s more support in some of these Canadian companies.”
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How concerned should Canadian investors be?
Eric Kirzner, a finance professor at the University of Toronto, explained to Global News that investors should be aware of their assets and the possible risks — but not necessarily act.
“You can’t completely stick your head in the sand,” he said. “Investors should look at their portfolio. We want to make sure our exposure is relatively safe on the interest rate side.”
But he cautioned against making decisions in the midst of market volatility.
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Kramer agreed, saying that those who act too fast often lose out.
“Markets will go up, and markets will go down A sensible buy-and-hold strategy makes sense even when markets suffer losses,” Kramer said. “A sensibly designed portfolio is meant to be held long-term, and investors should resist making any drastic changes in response to market fluctuation.”
The professor added that Canadian investors should look for advice from professionals before buying and selling in the midst of market anxiety.
— With files from Reuters, Associated Press
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