The Dow Jones Industrial Average fell more than 1,100 points on Monday Feb. 5, 2018. This was the worst Dow Jones intraday point fall in market history. The rollercoaster-like plunge did not happen until late in the day. Unlike in the past, there does not seem to be any one thing that set off this latest selloff.

Breaking it down

When some people hear “stock market” and “Dow Jones” they get confusing visions of graphs and numbers assaulting them. These terms, however, are actually simple to understand.

The stock market is just a forum for traders to buy and sell different financial assets amongst themselves. All of these actions are then represented through different indictors, like the Dow Jones or S&P, which track the stocks of different companies.

Financial assets are often referred to as “securities.” These can be things like derivatives and bonds, but they are mostly stocks. A “stock” is the aggregate ownership of a company. A “share” of a stock represents one fraction of ownership in that company, and thus a right to that fraction of the company’s assets.

This recent readjustment is no surprise to most observers. Drury Breech School of Business Professor Steven Mullins is one of said observers.

“This downturn was not unexpected at all,” explained Mullins. “If you put it in the perspective of how the stock market has performed since the 2009 recession, the gains have been quite solid. And hard to justify on the basis of corporate earnings growth.”

What he means by this is that the price earnings ratio was too high. Basically, the price of a stock became extremely high relative to the annual earnings that the stock generates for its shareholders by way of dividends. Thus, the prices were “inflated” and were bound to soon be sold off by investors who realized this.

The recipe for disaster

This, and other happenings, are what led to the down-turn. The Mirror, with considerable help from Mullins, has identified a recipe for this most recent loss. The ingredients to which are not meant to be exhaustive or fully explanatory.

The psychology of investors that the stocks are soon going to fall turned investors from “greedy” to “fearful.” In order to avoid losses, many decided to sell, making other investors panic and want to sell as well.

Fear of an increased interest rate means that investors are more likely to move assets from stocks into low to no-risk formats like savings accounts and CDs where a higher interest rate means more revenue can be generated at less risk. This means that investors will be more likely to try and preemptively sell before an interest rate hike-induced selloff.

The change in the chairmanship of the Federal Reserve from Yedlin to Trump’s nominee, Powel, created uncertainty in what interest rates are going to be.

A strong job growth report, while a good indicator of economic growth, scared investors. People who buy and sell stocks think of job growth as potentially making inflation a problem. This might cause the Federal reserve to increase interest rates to battle inflation.

Wages also increased which means items cost more. This in turn creates more inflation. Which, surprise, also might mean the fed will increase interest rates.

The selloff was partially automated. The automation of buying and selling stocks means massive group selloffs. Traders can set a computer to sell at a certain time, or if a stock goes under a certain value. If a bunch of large “intuitional investors” have their computers set to the same values on which to sell then it can turn a minor downturn into something much larger.

“This isn’t something that should freak people out,” said Mullins. “It does not mean that the economy is going to enter a downturn. The stock market is much more volatile than the real economy is.”

Economist Paul Samuelsson once joked: “The stock market has predicted 9 of the last 5 recessions.”

Mullins argues that while the stock market is important, observers should worry more over the change in the Index of Leading Economic Indicators which, for the time, is relatively stable in the United States.