The Stock Market Dropped Over 1200 Points: Here’s Why
Tuesday, Sept. 13 came with a wild surprise for the stock market: the largest decline in more than two years.
One week ago, stocks showed hope of a promising future after more than a month of decline. The major stock indexes were steadily increasing and investors were beginning to trust the market. The three major stock indexes, which include the S&P 500, Dow Jones and Nasdaq, were on their most successful rise in three months. All was finally looking optimistic for the economy. The stock market could finally be trusted. Or so we thought.
Simply put, the Consumer Price Index (CPI) was higher than estimated. The release of a major CPI report changed everything. To understand why this affected the market, you need to understand the CPI, which measures the average price of consumer items over time, tracks the amount of money people are paying for their household items and how much more or less the number is than the prior year. It is a valuable statistic to consider when estimating inflation data, as the average amount people are paying for their goods shows how much the dollar is worth.
Thus, August’s CPI report was released on September 13 and it shockingly showed that consumer prices rose 0.1% since July and 8.3% since last August. Although there had been steady growth and Bloomberg L.P., the most trusted predictor of economic trends, had predicted prices to fall to 8%, the CPI remained high. This ruined investors’ hopes that inflation would slow to a moderate rate in the near future. This report demonstrated to many investors that they cannot currently trust the inflation rate to drop into healthy territory soon. There is very little trust in the economy. This directly impacted the major stock indexes.
How will this CPI report affect the future? Both the CPI report and the stock market crash will affect the Federal Open Market Committee’s (FOMC) meeting on Sept. 20. The FOMC meets eight times a year to discuss the economic health of the American economy and set the interest rates for the period until the next meeting. Usually, when inflation is high, the FOMC will raise interest rates in order to encourage saving and discourage spending. By doing this, The FOMC tries to entice the average consumer to save money and wait for a time when the interest rates are lower in order to spend it. When people spend less, there is lower demand for goods, causing businesses to lower their prices. This ultimately leads to lower inflation numbers. Because this month’s CPI report showed that the inflation rate is historically high and increasing steadily, the current assumption is that the FOMC will raise the interest rates. Combined with the fall of the stock market, this could finally lower the inflation rate. However, at the previous meeting, the FOMC raised interest rates by .75 points for the same purpose of lowering inflation, and it evidently did not achieve this goal. Many assume that the FOMC will raise interest rates more aggressively this time.
After the news of the CPI report and the stock market plunge, two important questions must be answered: First, will investors completely lose trust in the stock market, leading to further market decline, or will they try to capitalize on a “buy low” scenario? Second, what will the FOMC decide about the interest rates in their much-anticipated meeting? These two questions will have dramatic effects on the economy and our economic future.
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