Bad day turns terrifying as Dow suffers worst point plunge ever; over US$1 trillion wiped from US stocks

The Dow Jones Industrial Average on Monday tumbled almost 1,600 at its lowest point - its biggest intra-day point decline in history. PHOTO: EPA

NEW YORK (BLOOMBERG) - Even before the opening bell, Monday (Feb 5) looked like a bad day for the US stock market.

But not even pessimists were prepared for the white-knuckled ride that for 15 harrowing minutes sent the Dow Jones Industrial Average tumbling almost 1,600 at its lowest point - its biggest intra-day point decline in history.

Coming after a 666-point rout on Friday shook investor confidence, Monday's plunge left many investors wondering just where the pain would end. With the back-to-back declines, the 5.8 per cent gain in January has been more than wiped out.

"There's certainly concern," said Paul Nolte, a portfolio manager at Kingsview Asset Management in Chicago. "It's 'Should we get out? What do we do here?' They're afraid of a crash. Certainly to see the market down as much as they are is disconcerting, especially with the nice run that we've had even into this year. They don't want to give up the gains."

Despite the magnitude of Monday's decline - the Dow closed down 1,175 points, or 4.6 per cent, paring about one-third of its biggest plunge - few traders saw panic in the market. Rather, the move appeared to reflect a growing sense that a strong economy might stoke inflation and push interest rates higher even faster than people have been expecting.

"We had gone too far too fast in the month of January and a little brush fire like this is not a bad thing," Philip Blancato, chief executive of Ladenburg Thalmann Asset Management in New York. "Today was a classic risk-off day when so much of the selling is going to be program trades based on technicals. It cleans up some of the people who are on the fence. You got the irrational exuberance out of the market."

Adding to the angst were concerns that computer-driven trading strategies - some geared to the low market volatility of late - might have abruptly accelerated the decline. A few analysts used the term "flash crash" to describe the events, a loose term that denotes everything from exchange malfunction to harmonised selling by quant funds.

"Millions of quant orders went in one direction, and it overwhelmed a lot of these breakers. That's it," said Dennis Debusschere, head of portfolio strategy at Evercore ISI, said by phone from New York. "It was very quant, very systematic."

A group that may be suffering the most is anyone who is shorting volatility, a trade that amid two years of market tranquillity has been a route to some of the easiest money on Wall Street. As markets buckled, the Cboe Volatility Index surged 124 per cent to 38.8. It closed at 37.32, still up 115.6 per cent.

That said, Monday's sell-off is not completely unprecedented, particularly in comparison with the period during and after the financial crisis. For four days in August 2011 the Dow alternated up and down days of 4 per cent and 5 per cent, and it tumbled as much as 6.6 per cent on Aug 24, 2015. Those days were quickly forgotten as the bull market picked up steam.

"I don't sense a whole lot of panic," Doug Ramsey, chief investment officer at Leuthold Group, said by phone. "Just 10 days ago, momentum was at the highest level in the S&P history and it would be very unusual if the stocks made a final bull high when the momentum was that strong. I'm not sure this is the end of the adjustment, but the odds are in favour of the market stabilising here in the short term and trying to push to a higher high."

The worst day for US equities in 6½ years came with a price - namely US$1.25 trillion (S$1.7 trillion). That is roughly how much was wiped from the value of American stocks in the frenzied selling on Monday. The 4.1 per cent drop in the S&P 500 Index left the market cap of US stocks at around US$29 trillion. That was enough to undo all the market capitalisation added to equities in the aftermath of the Republican tax cuts.

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