If you're an economic optimist, Thursday probably wasn't your best day. When the clock struck 4 p.m. on Wall Street, the Dow Jones Industrial Average (DJINDICES: ^DJI) had tumbled 274 points, marking its second-worst single-day drop of 2017. The drop reminded investors, according to numerous news outlets, just how fragile the U.S. economy is.
Catalysts behind the Dow's no-good, very bad day
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Perhaps the biggest concern for investors yesterday was the news of a terror attack in the heart of Barcelona in which more than a dozen people were killed and more than 50 others were injured.
Additionally, speculation has been swirling that National Economic Council Director Gary Cohn, the White House economic policy coordinator, may have one foot out the door. Though the White House has denied such reports, if Cohn were to leave, it would make the path forward for tax reform that much more difficult for the Trump administration. As a reminder, investors have been factoring in an expected cut to corporate tax rates in the somewhat near future. If that doesn't come to fruition, valuations for stocks may need to be adjusted lower.
Add on the fact that it's been a while since we've witnessed any sort of sizable, extended correction in stocks, and we have what worked out to a 274-point "plunge" in the Dow Jones Industrial Average on Thursday. The horror, right?
Well, not exactly.
Putting the Dow's 274-point drop into perspective
Even though the Dow had what many outlets would suggest was a terrible day, the 274-point "plunge" amounted to a percentage decline of just 1.24%. While I don't have the data in front of me of how many times in its history the Dow has moved 1.2% or greater up or down, I'd be willing to place my bet on this figure being in the high hundreds, if not well over 1,000 separate times. In other words, if we were to look at the Dow's history, a 1.24% decline is nothing more than a pedestrian daily move.
To put this into even greater context, let's have a look at the Dow's biggest percentage declines and point drops of all time.
As you can see from the above tables, it would take a roughly 470-point drop in the Dow just to break into the biggest 20 point drops of all time. Nevertheless, a 470-point drop is only a 2.1% decline based on Wednesday's closing value in the Dow. We have to keep things in perspective, which means realizing that the Dow has more than tripled in value since March 2009. As the Dow's value increases, its intraday swings higher and lower would be expected to increase, too.
On a percentage basis, again, a 1% or 2% decline in the Dow is not an extraordinary move. A decline in the Dow would need to be at least 7% (more than 1,400 points) in order to breach the 20 largest percentage losses in a single day. Yesterday's 1.24% drop was miles away from joining that list.
Here's what investors should be doing
Thursday's "plunge" in the Dow shouldn't change a whole lot with regard to your investment thesis. The same criterion you were using to dissect stocks and decide where to invest your money prior to the Dow's 274-point drop is almost assuredly just as valid today. However, a big point drop in the Dow does serve as a reminder to take care of some "housecleaning" and to consider adding income stocks to your portfolio.
In terms of housecleaning, we as investors should be periodically reviewing our portfolios to ensure that the stocks we're holding still meet our investment thesis. Essentially, we should ask ourselves if the reasons we originally bought a stock still hold true. If they do, then there's absolutely no need to consider selling a stock, or group of stocks, just because they had a rough day, or rough couple of days. If, however, the investment thesis has changed, then it could be time to part ways with a stock. We don't need a large point or percentage drop in a major U.S. stock index to review our holdings, but these fairly regular declines serve as reminders to take care of some portfolio due diligence.
Drops in the Dow greater than 1% can also be a good illustration of the purpose that dividend stocks can serve in our portfolios. Dividend stocks can help hedge against paper losses accrued during stock market corrections. More importantly, only companies with time-tested business models tend to pay dividends, which means investors who include them in their portfolios should sleep well at night no matter how volatile the stock market gets.
Long story short: Relax! Thursday was just one normal day of the thousands you're liable to see during your time as an investor.
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