The Dow Jones Soars 936 Points

On Monday, October 13th, the Dow Jones Industrial Average shot up 936 points, recovering after about a week of plummeting stock prices that terrified investors. According to Portland Business Journal, the Dow Jones experienced "its biggest-ever point gain, and the biggest one-day percentage advance - 11 percent - since March, 1933." This is a lot of gaining in just one day! But what does it mean?

What the Dow Rally Means

First of all, this recession is almost as much a result of psychology as it is plummeting stock prices and a subprime loan debacle. I know that's a pretty bold statement, but it has a lot of truth: the federal government was slow to react, and the way it reacted--the bailout--didn't sit well with everyone. When everyone is scared, watching investment banks and credit fail, they sell and try to put their money in something safer. Even people that don't feel the need to sell tend to panic when they see the market tumbling.

No one could have predicted such a stomach-churning market sell-off last week, nor that it would last so long. Low stock prices make people buy, and the lower a stock price falls, the more likely people are to jump in. It's mostly psychological; once people see the stock climbing, they jump in on the way back up so they don't miss out. I hate to bring in Physics here, but Isaac Newton has a point: every action has an equal and opposite reaction.

How does the market affect me personally? Well, my savings are in a Federally Insured Credit Union, specifically a Certificate of Deposit (with a lamentably low interest rate, I might add). I also have money saved up in a Roth IRA with American Century, but it is out of the stock market and in a money market fund right now, which is still a dollar per share last I checked.

To clarify, I'm out of the stock market because it's too volatile. The recession isn't over yet; I think this was a release of pent-up demand after a long decline in stock prices. However, don't panic--we're not likely to repeat a 1929 crash, because there are restrictions for buying on margin. People in the 1920's borrowed ridiculous amounts of money to invest in stocks, artificially pushing up the stock prices--kind of like the current subprime loan mess, where lots of loans make the books look good, but few can afford to pay them.

My prognosis: don't expect the stock market to stabilize until after November 4th at least. Until we know who our next president is, America is going to feel uncertain, and uncertainty means an unpredictable market. Keep hanging in there.

Sources:

Jeff Clabaugh, "Dow Jones Rallies More Than 900 Points," Portland Business Journal
"Margin Trading: What is Buying on Margin?", Investopedia