Dow has worst drop since February: What happened?

Staff Writer
Columbus CEO

The Dow Jones industrial average plunged 317 points on Thursday, wiping out its gain for the year. It was the biggest drop since February and gave the index a loss for July after five straight months of gains. Here are some questions and answers about the sell-off and what might come next.

Q: Why did the stock market fall?

A: A number of worries have been building for investors in recent weeks and several of them came together on Thursday. That prompted people to dump stocks, breaking several months of calm in the market. A number of large U.S. companies reported poor quarterly results or forecasts, including Whole Foods Market and Exxon Mobil. Tensions are escalating between Russia and the West, threatening Europe's economy and energy needs, and the Federal Reserve is getting closer to ending its powerful economic stimulus program. Also, the market has gone for an unusually long time without a significant pullback.

Q: How bad was it?

A: The Dow, an index of 30 large U.S. stocks, had its worst day in almost six months. The Standard & Poor's 500, a broader measure of the market and the benchmark for many index funds, lost 2 percent, its worst one-day decline since April. The S&P 500 index is still up 4.5 percent for the year and closed at a record high just one week ago. The Dow is slightly negative for the year.

Q: Does this mean the stock rally is over?

A: Not necessarily. Company earnings, one of the most important drivers of stock prices, are still at record levels and are expected to grow by 8.6 percent in the second quarter, according to S&P Capital IQ. That compares to growth of 4.9 percent in the same period a year ago and 3.4 percent growth in the first three months of this year. Also, the market has bounced back from other big drops this year. The S&P 500 slumped 3.6 percent in January but rose steadily for five months after that.

Q: What comes next?

A: The next order of business for investors is the monthly jobs report coming out Friday morning at 8:30 a.m. Eastern time. Investors will be looking to see if U.S. employers are adding enough jobs to suggest that the economy is picking up momentum. They'll also be looking for signs that wages are growing, which might suggest that the Federal Reserve could move sooner than expected to raise interest rates in order to stave off inflation. Stock investors don't like higher interest rates because it makes it more expensive for companies to borrow money and invest in their business.