This has not been a good week for the U.S. Stock Market. Monday and Tuesday stocks were flat for the most part. There wasn't a huge change in closing prices for the Dow Jones Industrial Average of 30 significant stocks. But Wednesday, stocks took a dive dropping nearly 832 points and Thursday wasn't much better. The Dow closed down almost 546 points. So what are investors afraid of? What's causing them to sell their stocks generating a drop in stock prices?
The big factor is rising interest rates. If the U.S. economy grows too fast so does the threat of inflation, when prices rise and money buys less.
The Federal Reserve, America's Central Bank, has a tool it can use to try to limit inflation. It can raise interest rates to slow down the economy.
But one side effect of that is that higher interest rates make it more expensive for American consumers and businesses to borrow money. If they can borrow less, they tend to spend less. So companies on the stock market make less in profits and investors sell their stock. It's a connected chain of events. Wednesday was one of the U.S. Stock Market's worse days ever in terms of the number of points it lost.
UNIDENTIFIED FEMALE: The U.S. Market started the day lower and the losses only got worse. In the end, the Dow closed down more than 800 points and that was it's third worst points drop in history. The tech nominated NASDAQ was the worst hit down more than 4 percent. It's worst day in over two years. Now fears among investors have been rising in recent weeks. Ironically because of mounting evidence of the strength of the U.S. economy. We saw that reinforced again last week with news that U.S. unemployment was at it's lowest level in nearly 50 years.
Now the problem with this strong economy is that it's leading to higher interest rates. Higher bond yields which effect everything from car loans to mortgage rates and a potentially faster pace of rate rises from the Federal Reserve which could raise borrowing cost for companies and hit earnings. Tech stocks were the worst hit. Apple, Amazon, Facebook and especially Twitter all sharply lower on the day.
Now these are seen as the riskiest stocks and that means they're the first place the investors pull their money out of when interest rate fears are rising. And on top of that, with no signs of a breakthrough in the U.S.- China trade war, investors are getting increasingly nervous about a slowing Chinese economy. That played out today in some of the luxury stocks that rely on the Chinese market.