The stock market hit a 666 point decline on Feb. 2 after a month of steady inclines in the Nasdaq and Dow Jones.
Zhongyi Li, a fourth-year economics PhD student, said this low in the stock market can be attributed to several occurrences in the United States economy, such as the long-term effect that comes from a lack of technological innovation.
“The most intelligent people are playing with money and not technology, they are all trying to get into finance,” Li said. “If you want to make the U.S. economy alive again, you have to fundamentally change the structure.”
Li said that, along with a workforce tending away from jobs in the field of technology, surges of “shorts” on stocks, or selling stocks with the intent for profit, are also contributing to the unusual low in the market.
“Whenever they reach highpoints there will be people shorting the stocks,” Li said. “And when the short volume goes too high, and investors observe that people start selling stocks, that’s how the crash begins.”
Chadd Schwartz, an eighth-semester finance major and the investment portfolio manager of the business fraternity Alpha Kappa Psi, said he is scrutinizing the stock market’s happenings because the fraternity’s investments, along with his personal investments, have the potential to be impacted by stock market fluctuations.
Schwartz said the influx of shorting stocks is a result of increased rates in fixed income securities, which are investments that receive fixed payments to buyers.
These securities became more appealing to investors due to government rates rising to 2.857 percent, Schwartz said.
“Fixed income securities are considered a risk free rate because the government can't really default on the bond, so you're guaranteed to be paid back that money,” Schwartz said. “When those rates rise, it’s enticing to investors because they are going to receive more when the award goes up and essentially no risk.”
Schwartz said this increased popularity in government bonds has made stocks less attractive, which resulted in stock investors allocating money from stocks to bonds. Another factor, Schwartz said, is the recently heightened rate of inflation.
“Unemployment has been down to 4.1 percent, which is below the natural rate of unemployment,” Schwartz said. “When more people have jobs, employers will raise wages a little bit. This means you’re putting more money out there.”
Schwartz said the increase in money circulation causes inflation, which deters investors from investing in stocks. He added that this increase in inflation, along with a decrease in stock prices, results in a “snowball effect.”
“There is a high frequency of people trading,” Schwartz said. “When you buy a stock, you can set a trigger. If the price falls below that trigger price, it will automatically sell when the market dips down a little.”
As for Schwartz’s investments through AKP, he said the fraternity was not severely affected by the activity in the stock market because they thought in the long term and compiled a diverse portfolio.
Schwartz said he does not foresee any substantial crashes in the near future because what is happening now is a norm for the financial sector.
“Usually when you see interest rates rise, it is normal for the stock market to have a pull back,” Schwartz said. “The market will always correct itself.”
Lillian Whittaker is a campus correspondent for The Daily Campus. She can be reached via email at firstname.lastname@example.org.