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The Dow Jones indus­trial average expe­ri­enced its largest single-day drop ever on Monday. Katherine Scheu | Col­legian

The U.S. economy still appears healthy, according to pro­fessors in Hillsdale College’s eco­nomics department, despite the Dow Jones indus­trial average expe­ri­encing its largest single-day drop ever on Monday.

“The under­lying market economy clearly has not changed much over the past few days,” said Gary Wolfram, eco­nomics department chairman. “The economy is actually doing well.”

The stock market index fell nearly 1,600 points at its low and closed 1,175 lower than its opening value, a 4.6 percent drop. That was the Dow’s largest intraday decline since August 2011. After Monday, the Dow has expe­ri­enced volatile swings.

Hillsdale eco­nomics pro­fessors, however, noted that the stock market is only one indi­cator of the economy and that other signs appear to be trending well with recent reports of wages increasing, a steady unem­ployment rate at 4.1 percent, and new tax and reg­u­latory cuts.

“It might update my feelings on the year a little,” Asso­ciate Pro­fessor of Eco­nomics Michael Clark said. “It’s one indi­cator, yes, so we update — mar­ginally. Do I like seeing my net worth drop 4 percent in one day? No, but I don’t see it as symp­to­matic of a func­tional problem of current invest­ments and market activ­ities.”

Janet Yellen told CBS News in her final interview as the Federal Reserve chair­woman in an article pub­lished Sunday that the stock market and other assets were running high.

“Now, is that a bubble or is [that] too high?” she said on Friday, her last day at the Fed. “It’s very hard to tell.  But it is a source of some concern that asset val­u­a­tions are so high.”

Wolfram said her statement might have sig­naled a rush of selling. It also may have hinted that interest rates could soon rise again, encour­aging people to look into more secure invest­ments such as bonds.

Asso­ciate Pro­fessor of Eco­nomics Charles Steele noted that low interest rates on bonds have driven many investors to the stock market, perhaps leading to the highs the Dow has seen. It set a record high of 26,616.71 on Jan. 26.

“I think there has been some­thing of a bubble,” Steele said. “The stock market, if you want your money to grow, has been one of the few places to put your money.”

Between Feb. 1 and Tuesday’s opening, however, the Dow dropped 7.7 percent. Wolfram said changes within 10 percent typ­i­cally rep­resent a cor­rection.

“I think what you’re seeing is a normal pullback driven by traders, but it’s been orderly,” Wolfram said. “We have not done that for a very long time.”

Nonetheless, over one year, the Dow was still up 21 percent after tanking. Wolfram noted the typical expected rate of return over years on the stock market is 8 to 9 percent.

“The price to earnings ratio was a little high, and now it’s a little low,” Wolfram said. “That tells you this thing is going to bottom out.”

That would likely spur more buyers, he said. For now, though, the market is in flux, Wolfram said.

“People are going to be scared,” he said. “You’re going to have some volatility over the next, probably, couple of weeks.”

 

  • Alexan­derYp­si­lantis

    I’m heavily invested in Equities and remain so after the cor­rection. As Warren Buffet noted, nobody can predict cor­rec­tions and the worst thing you can do is over­react to them. Jumping in and out of stock markets based on cor­rec­tions is a pre­scription to watch your earnings get eaten up in capital gains, so why do it? The better course is to weather the storm and wait for a recovery. I’m not sure I agree with Janet Yellen that the markets are ‘over­valued’, I cer­tainly don’t see many P/E ratios in what I would call exces­sively high ter­ritory. There is plenty of growth left in this bull run, the best course of action is to wait for the skit­tishness to subside and for the capital to re-enter the markets. Dollar Cost Aver­aging is the best strategy to wealth for someone of college age.