The Dow Jones Industrial Average is a price-weighted average of 30 large stocks which are used as a benchmark for the overall stock market movement. On Thursday May 6, 2010, the Dow suddenly fell almost 1,000 points before pushing its way back up. Although the 340 point loss on Thursday was undoubtedly significant, the market fared much better than how it looked a few hours before close. Nonetheless, all 30 stocks showed negative activity for the day, some performing much worse than others.
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The Biggest Losers
|Bank of America (NYSE:BAC)||-7.13|
|JPMorgan Chase (NYSE:JPM)||-4.38|
|General Electric (NYSE:GE)||-4.36|
|American Express (NYSE:AXP)||-4.34|
The Smallest Losers
|Travelers Companies (NYSE:TRV)||-1.62|
|Kraft Foods (NYSE:KFT)||-1.82|
|Proctor & Gamble (NYSE:PG)||-2.27|
Companies making up the Dow are from an assortment of industries including technology, financials, fast food, pharmaceuticals and conglomerates. At the end of the day, the financials showed the poorest performance, as Bank of America, JPMorgan Chase and American Express showed an average loss of 5.28%, erasing $22.3 billion of combined market cap value. Consumer staples showed the lowest losses, as McDonalds, Kraft Foods, Proctor & Gamble and Coca-Cola had an average decrease of 2.09%.
Bank of America
The massive loss for Bank of America occurred even before they disclosed that they currently carry a $1.3 billion exposure to Greece. BAC has $193 million of Greek sovereign debt and over $1 billion of non-sovereign debt. Although this isn't expected to be as nearly as devastating as its previous exposure to subprime mortgages, Bank of America's balance sheet, along with those of other financial institutions, will be affected by the outcome of Greek austerity measures.
Consumer staples, based on the inelastic nature of demand for every day products, tend to experience less volatility than other economic sectors. McDonalds, for example, carries a beta of only 0.62, 61% higher than the industry. In fact, the industry only has a beta of 0.48. Contrasting this with JPMorgan which has a beta of 1.13 and Bank of America, having a beta of 2.40, consumer staples performed relatively well on days like May 6.
What Went Wrong
The actual cause of the great plunge is under investigation. President Obama remarked that "The regulatory authorities are evaluating this closely with a concern for protecting investors and preventing this from happening again, and they will make findings of their review public along with recommendations for appropriate action."
The wave of unusual trading activity on Thursday sparked the largest one day point drop of the Dow Jones. Despite that a partial recover quickly ensued after the index temporarily dipped below 10,000 the unusual instability caused investors to lose billions of dollars in a matter of minutes. Furthermore, because such an odd occurrence was allowed to happen, a wave of pessimism and uncertainty will influence future investor sentiment.
The Bottom Line
The great plunge was short lived, but the psychological effects it has caused will surely have a long lasting effect. (The tenets of market psychology underlie each and every charting tool. To learn more, see Trading Psychology And Technical Indicators.)
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