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After yesterday’s 800-point pounding, the Dow Jones Industrial Average lost an additional 500 points today. That brings the two-day loss to around 5 percent. For the tech-heavy NASDAQ, the numbers are even worse.
If you’re not feeling at least a little freaked out, you must not have any money in the market.
When I wrote an article after a similar decline back in February, I was unconcerned, saying, “Anytime stocks go up in a straight line — and this market pretty much has — a pullback like this one is par for the course.”
I’m not so sanguine today. In fact, as fate would have it, three days ago I told my wife it was time to move some of her 401(k) money to the sidelines. Unfortunately, however, all I did was tell her. We didn’t actually do anything.
As I also said in February, I believe the economic underpinnings of the stock market are still strong. But today, I think the risks are increasing and the opportunities are decreasing.
Read on for questions and answers about what’s happening now and what you should be doing. Pay particular attention to “Should I buy? Should I sell?”
Why is the market falling?
The market is falling for two primary reasons:
- Interest rates are rising. Interest rates have been steadily rising for two years now. The Federal Reserve has now raised its benchmark federal funds rate eight times in three years. This hurts stocks in three ways. First, if companies pay more to borrow, that pinches profits. Second, when rates rise, investors take money from the market and put it someplace safer. After all, if you can make good money in an insured bank account, why take a risk on stocks? Finally, rising rates make the dollar stronger, which makes American products more expensive for other countries, hurting sales and profits.
- Trade war. The continuing trade war with China has the potential to hurt both our economies. We may ultimately “win,” whatever that means. But in the meantime, tariffs levied by both countries make products more expensive for both American and Chinese consumers. That slows economic activity in both countries. It also negatively impacts the profits of companies producing exports on both sides of the world.
Where is it going next?
As I said in February, the market will possibly drop more in the short term. But the economy is still solid, so stocks probably will not drop too much more. At least for now.
Should I buy? Should I sell?
As I also said in February, it’s too early to buy, it’s too late to sell. While I wish I’d actually moved some money out of stocks a few days ago rather than just talking about it, it’s too late now. There’s an old expression on Wall Street: “Don’t try to catch a falling knife.” The market is likely to be volatile for a while. Wait for it to settle down before getting in or getting out.
Is this the end of the good times?
This is probably not the end of the bull market that’s been going on for basically 10 years now. That being said, we’re getting close. I’d be surprised if our economy didn’t go into recession by 2020, or maybe sooner if rates keep rising and these trade issues aren’t resolved.
If I was 25 years old, I wouldn’t care about that. I wouldn’t do a thing, even if I was sure there was a recession on the horizon. Our economy always goes up and down, and the market along with it. I learned long ago not to try to time it.
The thing is, however, I’m closer to 65 than 25, so I’m getting more concerned with the return of my money than on my money. I’ve been investing in stocks for 40 years, and went all in during the Great Recession. I’ve been handsomely rewarded for doing so. So, while I won’t be doing anything within the next few days, I’ll likely take some money permanently off the table within the next year. Note that I said some: As long as I’m drawing breath, I’ll own stocks.
Does this market downturn have you panicked, or will you stay the course? Sound off by commenting on our Facebook page.