Stocks Freak Out, You Shouldn’t

The stock market is down big again. What is going on?

Two weeks ago it was the Federal Reserve and interest rates, last week was something. Now it’s… well…

A big drop in Biotech stocks comes after the least sympathetic man in all creation bought the rights to a decades old drug and then raised the price more than 5000%, then went on television to defend the increase. You remember that old Simpsons episode where they show Richard Nixon in a debate with Kennedy looking like Satan. Yeah. I was just like that.

Having attracted enough attention that politicians smell air time, Congressional Democrats now want to subpoena Valeant Pharmaceuticals (VRX), which although unrelated, has recently pushed the same business model of acquiring the rights to old drugs and then driving up the prices. Biotech stocks are down across the board.

biotech down

Oh, plus the uncertainty around the Fed and interest rates is still a thing.

Oh, and China too.

Market News and Reality

Here is where you can start to see the cracks in the idea that the stock market always rationally follows current new events.

First, Democrats do not control Congress. Republicans do, and they do not cooperate with Democrats, especially on something that can be perceived as “anti-business.” In other words, there is actually no possibility that anything comes of this other than bad publicity. So, the plunging stock price comes from what, exactly?

Second, most biotech companies do not have this same business setup. In fact, most big biotech companies have the protection of patents, and the reasonably well accepted PR that drugs are expensive to develop and that costs must be recouped. In other words, none of this has anything to do with say, Amgen, or companies that make X-ray machines, and yet, they are all down as well.

It is important for investors to remember that market moving news is almost always an excuse for the market to do what it needed to do anyway. Recently, the markets have moved up and up with little pause on a very week economy. So, now, they are looking for any excuse to take a break, or maybe drop back a little bit.

Continue to expect volatility like this all the way through the holiday shopping season. The, if (and only if) it seems like holiday sales are way up, will you see this fear subside for the near term. If, on the other hand, holiday sales are seen as lagging, it may be time for an even bigger pause, and extended volatility.

Remember that none of this has anything to do with your 401(k)s or IRAs, or anything. Do not panic based on short-term news.

Do consider re-evaluating your portfolio as the year ends. Year end is a great time to take a look at rebalancing, especially in your taxable accounts where you may have the opportunity to offset some gains, or even generate a nice little capital loss deduction for the year.

 

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