A Bad Week for Stocks: Is the Party Finally Over?

Is the sun setting on the mighty bull market? Maybe. Here's what you should do next.

A Bad Week for Stocks: Is the Party Finally Over? Photo by Chanthanee / Shutterstock.com

On the last day of every month, I tally my net worth: Everything I own minus everything I owe.

For much of the last decade, it’s something I looked forward to because, thanks largely to the stock market, my net worth has swelled nearly every month.

What a difference a few weeks makes. If you don’t know what I mean, you will when you open your next 401(k) statement.

As I began this article midway through the trading day, the Dow was down nearly 800 points, after losing a like amount just a couple of days ago. It ended the day, thankfully, down only 77. Still, one has to wonder, what’s going on? Answer: the same things that were going on when I discussed the market a couple of months ago. Here’s what I said in that article:

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.

It’s worse now

These reasons are still valid, but in some ways it’s now worse. Interest rates will probably go up a bit more soon, the yield curve has partially inverted (learn what that means here), the trade war is straining the economy, and President Donald Trump is rattling the markets with inconsistent messaging. For example, after claiming a huge win in his recent meeting with Chinese leader Xi Jinping, he sent a tweet three days later that became the catalyst for this week’s 800-point plunge:

Tariff ManMoney Talks News

CNBC sums up the mixed messaging nicely:

With no clear message or discernible strategy from the president on the China trade talks, what had seemed just a few days ago like it could be a shot in the arm to the U.S. economy, by Tuesday only added to the grim uncertainty facing investors.

Not only did this tweet represent an about-face from what the president said just a few days prior, it’s unsettling in another major way. While collecting billions in tariffs may MAKE AMERICA’S GOVERNMENT RICH AGAIN, tariffs don’t make most American consumers or American companies rich again. Tariffs raise prices to many companies and consumers, which impacts corporate profits and potentially puts a damper on consumer spending. Both could hasten a recession.

While tweets like this are probably designed to rattle China, they also rattle markets.

In my October article, I said “This is probably not the end of the bull market … 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.”

Still true, and more so as the waters grow murkier.

Should I buy? Should I sell?

If you’re a short-term trader, I can’t help you. As the economy cools, it’s possible the Fed will pause on next year’s planned interest rate hikes. It’s also possible our trade issues with China will be resolved. If either or both things occur, the markets will react positively. If they don’t, it probably won’t. So a short-term bet here is a gamble, plain and simple.

If you’re a young, long-term investor, my advice would be to adjust your expectations, but not necessarily your portfolio. Even if the stars align and all problems are resolved, we’re still nearing the end of one of the longest stock winning streaks on record. Trees don’t grow to the sky. But I’m not going to tell you to sell, for a simple reason: Then I’d have to tell you when to buy back in, and I’m not smart enough to do that. (If you find someone that is, please let me know.)

If you’re like me — a long-term investor approaching retirement age — I wouldn’t blame you for taking some chips off the table, especially if our trade issues get resolved and we get a nice bounce. The one thing I’d urge you never to do, however, is sell everything. Recessions and falling markets are part of the deal: They don’t last forever. And stocks are one of the few things around that provide long-term inflation protection.

And remember, knowledge is power, so do a little more reading: Check out The 10 Commandments of Wealth and Happiness and 9 Steps to Prepare Yourself Now for the Next Recession. Then watch the video below.

Does this market downturn have you panicked, or will you stay the course? Sound off by commenting on our Facebook page.

Stacy Johnson
Stacy Johnson @moneytalksnews
I'm the founder of Money Talks News and have spent the last 40+ years in the personal finance trenches. I'm a CPA, author of a few books and multiple Emmy recipient. I'm ... More

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