After Monday’s stock market fall, there was a run up yesterday on Tuesday, then a little drop on Wednesday, and now a 1000+ point market drop again today. So, let’s get a headcount before we proceed.
Stock Market Results Last Few Days
- Monday: -1175
- Tuesday: +567
- Wednesday: -19
- Thursday: -1033
Add it all up, and you get -1,660 for the week. Oh, and by the way, the market was down 666 points last Friday. From the market’s high point, this equates to a drop of a little over 10% putting us into correction territory. (A correction is usually defined as a drop of 10%.)
Do We Panic Now?
Take a look at what I wrote about Monday’s big stock market drop. Although the market has dipped even further, the result remains the same. For long-term investors with a well diversified portfolio, the best course of action is to ignore all short-term market moves. Even if this is the beginning of a recession (We are totally due for one) the long-term scenario is still the same. The ever higher march of inflation, plus a U.S. economy that always comes back eventually means that holding on, and continuing to invest is the best solution for long-term investing such as retirement, or even college savings for children 7 to 10 years out.
For shorter-term investors, it is time to look at what is going on.
The markets are reacting to a few different things.
First, the stock market has gone up and up, with almost no pullbacks for a very long time now. That really makes no sense considering the overall economy is not racing ahead that quickly. The overall optimism that business and consumers have is real, but this isn’t some boom times. As a result, a correction here is very healthy, and perhaps even necessary.
Second, the Fed has been consistently overplaying it’s hand regarding inflation in order to look like inflation hawks. The reality is that there is no need to keep marching forward with regular rate hikes to keep inflation below 2%, when inflation has never really approached 2 percent. Couple that with the fact that the Fed can remove liquidity (and inflationary pressure) from the market just by unwinding its balance sheet, and one can’t help but wonder if the Fed has finally tried too hard to be tough, and ended up actually breaking the economy. After all, this is right about the time that December rate hike should actually be hitting the economy.
Third, the bond markets (which are also very concerned about the second point above) have started getting skittish. There is a new Federal Reserve Chairman coming in. Trump has proven very erratic, and Congress is looking to pass a new budget that while politically savvy, is — economically speaking — the equivalent of passing a stimulus package of domestic and defense spending just while people are starting to wonder about inflation.
Add it all up, and the markets don’t like the upcoming scenario where the Fed is thrust into a position where it will likely confront inflation either too strongly (and upset the economy) or too softly (and get behind on booming inflation), unless it exactly threads the needle.
Who Crashed The Market
Of course, these days, the daily action of the markets is highly influenced by machine, or computer, trading. It’s no secret to the people programming these machines that the market is overvalued, and that the economy may be tipping, and that the Fed may be killing the whole thing, or inflation may kick in. While the machines themselves have no fear, the same cannot be said for those who program them.
It is likely that the safeties, and sell triggers have been ratcheted up, and these kinds of big moves are the result of one program after another running for safety, or cashing in profits.
Either way, expect a volatile February, at least.