Is the stock market really in turmoil?
As we have heard in the news, the market is in a major sell-off. In the last few days there has been a large sell-off in the Dow Jones Average and to a lesser extend the NASDAQ and S&P 500. In Tuesday’s activity, the stock market dropped 567 points and then turned around and closed up 567.
However, the media outlets have focused on the Dow because it is more sensational. I guess the “Breaking News” sounds better when you say the market is down 1,000 or 1,500 points compared with 75 or 100 points. But remember, the Dow is only tracking 30 stocks and is hardly a gauge of the true market.
Let’s focus on the big point drop the other day. In reality, the pullback was actually not that impressive, but was great for TV tag lines. When the Dow was trading around 5,000 or even 8,000 back in the 1980s, a 1,500 drop in the market would be shocking. However, when the market is trading at 26,000, the same drop doesn’t have as much punch. Investors need to focus on the percentage of a drop and not the number of points of a decline.
As I have discussed with my clients, it is very healthy to get a 5 percent to 10 percent correction in the market, but this market has barely had a 2 percent correction in the last three years. We were overdue for a pull-back but at the same time, I don’t believe the market can fix itself in two or three days when the market has run up for three years.
However, when the correction comes to an end, I believe the market will move back into a rally mode because even with the bad news, we are still seeing strong earnings reports from a number of companies such as Amazon, Microsoft, GM, Toyota, and Dunkin Donuts as well as the benefits of the Tax Reform Act. For the long-term, the stock market is a good place to invest, but during these short-term times, there will always be some type of pull-back. As I tell clients, it’s hard to have the good without some of the bad.
Over the last few days, my phones have been silent. I guess this goes back to our numerous conversations with people and businesses that have become clients here at my firm. It is funny, the calls I am receiving are from non-clients who are not hearing from their brokers or are just nervous with the market. As one person put it yesterday, “I remember 2008 all too well and I need some advice because I lost too much money during the last correction.”
I don’t believe the drama is over but don’t get caught up in the daily gyrations. I have been watching reporters covering the news and it’s a bit much. I listened to one reporter use the word “plunge” at least three times in her three-minute segment. I have to smile.
Darek Hunt is an investment advisor. His views are not necessarily those of Aurora Strategic Advisors, LLC, and should not be construed as investment advice. This material is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. Neither the ASA nor the named broker dealer or investment advisor gives tax or legal advice.