Why Is the Stock Market Tumbling? And Should You Panic?

Photo (cc) by dflorian1980

The Dow Jones Industrial Average fell more than 1,000 points — or 6.6 percent — to open this morning. It later recovered, only to slump again and finish the day nearly 600 points lower than Friday’s close.

Panic abounds over what’s being described as everything from a typical stock selloff to a correction to another Black Monday.

Should you panic too? Probably not.

Today’s downturn arguably was expected. It’s also normal, and even a positive development for smart investors.

First, let’s look at how we got here. While it’s tough for any expert to pinpoint an exact cause for the severe stock slide that began last week, experts have cited multiple factors that could have contributed to what we’ve witnessed over the past several days. They include:

China’s economic turmoil continues. China has seen its share of recent financial trouble — from the country’s decision to devalue its currency to its own stock market drop of 9 percent today, Reuters reports. Because China has the second-largest economy in the world (after the United States), “concerns about a China-led global economic slowdown and tumbling commodities prices had U.S. traders fearing the worst,” as Reuters reported.

Stocks have been on a more or less upward trajectory for several years. That’s why experts like Money Talks News’ founder Stacy Johnson have been saying for months that the stock market is “long overdue for a pullback of 10 percent or more, known as a correction.” (Stacy wrote that in October 2014, after the Dow fell 6 percent in five days — and the Dow, the S&P 500 and the Nasdaq had lost their gains for the year.)

Corrections are a normal part of bull-market and general stock-market cycles. For example, mutual fund company American Funds notes that Dow declines “have been somewhat regular events.”

J.P. Morgan Asset Management recently noted of the S&P 500 that “despite average intra-year drops of 14.2 percent, annual returns [have been] positive in 27 of 35 years.”

Remember that stock correction Stacy wrote about last October? By spring and summer of this year, all three indices had recovered and hit record highs.

The threat of a possible interest-rate hike by the Federal Reserve looms. This was the catalyst for the stock market’s drops in June 2013, the largest of that year at that point. Stacy wrote at the time:

“Because stocks, as well as the overall economy, like low interest rates, that’s bad news.”

But rising interest rates are also good news in that they’re a sign of a “healing economy,” as Stacy described it.

Tim Courtney, chief investment officer of Exencial Wealth Advisors, tells CBS MoneyWatch:

“Household finances are growing more healthy … but you want to see a pickup in spending, too.”

Down stock markets also have an upside for so-called value investors like famed stock picker Warren Buffett, who has been known to purchase stocks in companies that are undervalued so he can profit when their prices rise. In 2001, he memorably likened stocks to hamburgers:

“To refer to a personal taste of mine, I’m going to buy hamburgers the rest of my life. When hamburgers go down in price, we sing the ‘Hallelujah Chorus’ in the Buffett household. When hamburgers go up in price, we weep. For most people, it’s the same with everything in life they will be buying — except stocks. When stocks go down and you can get more for your money, people don’t like them anymore.”

To learn more about how you can gain from today’s panic over a temporary 6.6 percent drop, check out Stacy’s story about the real Black Monday — Oct. 19, 1987, when the stock market had its largest ever one-day percentage plunge, of more than 22 percent: “5 Lessons From the Stock Market Crash of 1987.”

What’s your reaction to today’s stock market news? Share your thoughts with us in our Forums. It’s the place where you can speak your mind, explore topics in-depth, and post questions and get answers.

Disclosure: The information you read here is always objective. However, we sometimes receive compensation when you click links within our stories.

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