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Money News

What Caused the Market to Drop?

October 10, 2018

We talk tech shares, the rising yield of bonds, and dollar-cost averaging.

3 min read

Stock prices tumbled on Wednesday as investors sold off tech shares and fretted over the rising yield of bonds.

By the end of the trading day, the Dow, one of the key market indexes, closed down more than 800 points, or 3%—the steepest single-day decline for the index since the market correction in February. The S&P 500 sank 3.3% and the tech-centered Nasdaq fell 2.5%.

So what do you do when the markets go haywire?

Dollar-cost averaging through tough times

If you’re invested for the long-run and can handle the market volatility, one strategy to consider is called dollar-cost averaging. It’s essentially putting aside a set amount of money and investing it regularly over time.

Even if you take small amounts and invest them every week or every month, that can add up through the power of something called compounding. (Compounding is when the growth on the assets you own also grows, which can have a significant impact on your wealth in the long term.)

Over time, the highs and lows of the stock market should balance themselves out.

Of course, not everyone has the stomach to continue buying on the dips. That’s okay, too. If you’re more risk-averse, you can still invest for the long haul by holding more bonds in your portfolio. Bonds can help reduce the volatility of your returns as you ride out the ups and downs of the stock market.

Diversification is another key strategy you should employ. You can read more about that here.

Why did the markets just drop?

The sell-off follows a string of good economic news, including record low unemployment, increases in wage growth,  and a number of strong company earnings reports for the third quarter.

So what gives? We’ll break it down.

Bond yields are rising. It’s a little complicated, but let us explain. The yield on something called the 10-year Treasury—a bond issued by the federal government whose yield tends to affect other interest rates and borrowing costs such as mortgages and credit cards—increased to 3.24%.

While rising interest rates are generally a sign that the economy is doing well, they can also eat into the profits of companies. Why? Companies often have to borrow in order to fund their operations. And as their costs to borrow go up, that can reduce the amount of money they have.

Treasuries are responding to the Federal Reserve, the nation’s central bank. The Fed has been increasing a key interest rate called the federal funds rate since last year, in an attempt to control inflation and economic growth. (Central bankers decreased the rate following the financial crisis, to spur business.) The federal funds rate is a short-term rate that the Fed charges banks to borrow and lend money to one another. The federal funds rate also forms the basis of other interest rates in the economy.

Tech stocks led the way down. The so-called FAANG stocks of Facebook, Amazon, Apple, Netflix, and Google, whose parent company now calls itself Alphabet, have been some of the top stock market performers this year.

But on Wednesday, FAANG and other tech stocks led the market down. By the close of markets, Amazon’s share price dropped more than 6%; Netflix share price fell 8.38%, according to reports. Apple sank 4.6% and Microsoft dropped 5.4%, according to CNBC.

The Stash Way

At Stash, we want to take the mystery out of investing.

We know there can be a lot of confusing terms, and it can be intimidating, even scary, to figure out the smartest way to put your money in the market or to even get started buying your first stock, bond, or fund.

That’s why we’ve boiled down our investing philosophy into three basic steps that we call the Stash Way:

Stay strong, keep Stashing. Turn on Auto-Stash.

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By Jeremy Quittner
Jeremy Quittner is the senior writer for Stash.

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