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The U.S. stock market sell-off continued Monday with the Dow Jones Industrial Average suffering its biggest one-day point drop in history, plunging 1,175 points. The market gave back its 2018 gains as a flash-crash-style drop intensified a free fall in stocks that began last week. That leaves many investors worried and wondering what to do. Our firm is watching this situation very closely for our clients.

Why is this happening?
The stock market is still in midst of a 9-year bull market.  The S&P 500 spent the last 200+ days within 3% of all-time highs with no correction and gained over 22% in 2017.  Since President Trump was elected in November 2016, the DJIA has gained 45%, through its record closing high on January 26, 2018.

It’s important to remember that stocks will not go up forever.  Markets go up and down and this may be our wakeup call after 14 moths of gains. Most analysts consider this drop to be a normal correction, as opposed to a sign of a bear market. Many market watchers remained baffled about what prompted the sell-off since there was no major economic news or earnings reports from major companies on Monday.

Possible Factors in Sell-off

  1. Increase in interest rates – The 10-year Treasury bond yield rose to 2.85% on Monday, from 2.40% at the end of 2017.  Rising rates can put pressure on stocks.
  2. Inflation – There is a fear of spiking inflation, which can give cause for possible future rate increases.  Wage increases, while good for the economy, can also attribute to an inflationary environment.
  3. Bitcoin – The virtual currency has fallen from a high of $20,000 to less than $7,000.  This does not correlate directly with stocks, but can create an environment of negative sentiment for investors that have lost money in this asset class.
  4. HFT – Some of the late selling on Monday can be attributed to HFT (high frequency trading).  HFT is an automated trading platform used by large investment banks, hedge funds and institutional investors which utilize powerful computers to transact a large number of orders at high speeds.  These computers using algorithms to put in sell order.  Many orders hitting at once can magnify a sell-off.

Why the Bull Market May Continue 

While the sell-off can create some worry among investors, we want to shift the focus to the positives in the overall economy:

  • Corporate earnings and revenue growth are high
  • Low unemployment
  • Growing economy
  • Wage growth
  • Tax Reform and lower corporate tax rates

What to do?
Most likely, no action is needed.  Focus on why you are investing and your long-term goals.  We will work with our clients to make sure the current asset allocation (stocks verse bonds/cash) meets their risk tolerance.  Rebalance your portfolio when needed to bring back into alignment with the long-term plan.  Keep investment costs low and stay diversified. 

Our firm keeps the above principles at the forefront of our investment philosophy so our clients will be positioned well in volatile times.

Warren Buffett had this to say about a falling stock market…

“Don’t watch the market closely,” he advised those worried about their retirement savings. “If they’re trying to buy and sell stocks, and worry when they go down a little bit … and think they should maybe sell them when they go up, they’re not going to have very good results.  As long as you are invested appropriately for your goals, stay away from your investment portfolio.”

If you have any questions on your specific situation, please feel free to contact our office.