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Volatility Returns: Key Facts Behind Historic Stock Sell-Off

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A massive two-day sell-off that created historic volatility in U.S. markets swept across Asia and Europe on Tuesday, and investors are now faced with several key questions: What caused this market pullback? Is it just the beginning of something much worse? Could this be just a blip on the radar of the current Bull Run?

To answer these key questions, we need to dig further into the numbers.

Sell-Off By The Numbers

At one point on Monday, the Dow Jones Industrial Average had fallen 1,597.08 points, which marked its largest ever intraday point slide. The blue-chip average finished the day down 1,175.21 points, marking its biggest one-day point decline on record. As one might assume with such a substantial drop, all 30 companies that make up the index dipped.

Yet, due to the historic heights the index reached prior to the sell-off, the point slide was far greater than the percentage dip. The 4.6% decline represented only the largest downturn since August 2011.

Meanwhile, the S&P 500 shed 113.19 points on Monday, while the Nasdaq Composite also dropped by 3.8%. The Chicago Board of Trade’s Volatility Index, or VIX, which measures market volatility, soared well over 100%, marking its largest one-day climb on record (also read: Dow Plummets as 2018's Runaway Gains Disappear).

Still, many worse single days have occurred, and a full market “correction” means a 10% drop from a peak, which is something that many analysts and investors have been preparing for amid a torrid climb that saw the S&P skyrocket 32% since the presidential election.

What Might Have Caused This Pullback?

With only a few days to analyze this current sell-off, analysts have had a hard time trying to pinpoint exactly what might be causing this rush to liquidate market-driven gains. With that said, there are more than a few possibilities, and it is quite possible all of them, or none of them, turn out to be the real driving forces.

Notably, speculation surrounding the cost of borrowing going up is one possible catalyst that might have led to this sell-off.

The Bureau of Labor Statistics released strong wage data last Friday, which noted that the U.S. economy created 200,000 new jobs in January. The BLS also reported that wages rose by 2.9% on an annualized basis.

This better-than-expected job and wage growth led to worries that the Fed will raise interest rates more aggressively than previously anticipated in order to curb possible inflation.

Additionally, the yield on 10-year Treasury notes hit a four-year high on of 2.85% Friday. That benchmark yield rested at 2.76 % as of 1 p.m. EST on Tuesday, signaling that some investors have slowly pulled their money out of U.S. government debt, which often becomes a safe-haven during market sell-offs.

Furthermore, the current ubiquity of automated algorithmic trading might also have played a role in this large sell-off. Algorithms that now control a large portion of trading are often programmed to buy and sell based on certain triggers like specific price points. A snowball effect could have started when “sell” level warnings were reached across markets.

On top of that, the prevalence of exchange-traded funds, which allow investors to trade stocks that are actually a bundle of other stocks—akin to mutual funds—added to the sell-off.

Another reason, which CNBC’s Jim Cramer pointed to, is the influx of first-time investors who entered the market during the historic climb. Cramer noted that many of these investors panicked and rushed to sell.

Several major U.S. brokerage firms experienced major website malfunctions on Tuesday amid a third-straight day of volatile trading. Fidelity and TD Ameritrade (AMTD - Free Report) both experienced either complete temporary crashes or massive slowdowns on their online platforms.

Is The Sell-Off Here To Stay?

Today, Treasury Secretary Steven Mnuchin told reporters that he is “not overly concerned about the market volatility” and that the fundamentals remain “quite strong.”

This is part of a growing sentiment among many financial experts who think the recent sell-off was simply a brief market pullback to help recalibrate lofty valuations and sky-high P/E ratios that began to run rampant across the S&P.

Zacks Executive Vice President Kevin Matras said as much in an email to clients on Tuesday. Matras pointed to the recent tax cuts and overall consumer confidence as evidence that the economy is humming along.

This is not to say that the current sell-off will stop abruptly, but it seems that sentiment among many in the investing world is that some of the biggest companies simply climbed too far too fast, and it was time to reel in some gains.

As of midday, tech giants Micron (MU - Free Report) , Netflix (NFLX - Free Report) , Nvidia (NVDA - Free Report) , Apple (AAPL - Free Report) , and Amazon (AMZN - Free Report) were all up over 2%.

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