The No. 1 Question on Every Investor’s MindOctober 14, 2018
It was a rough couple of days for investors.
The major indices fell out of the sky. The tech-heavy NASDAQ fell from 8,100 to 7,300. The S&P 500 dropped from 2,925 to 2,725.
And, after hitting an all-time high of 26,951, the Dow Jones Industrials plummeted 1,400 points.
Of course, it’s tough to sugarcoat such a pullback.
But we have to remember a few things. Markets don’t run up in straight lines. We were long overdue for a healthy pullback. It’s perfectly normal to see pullbacks in bull markets.
In the dot-com boom we saw more than five declines of more than 10% during the run.
Two, investors got a bit over-excited and nervous about bond yields.
The benchmark 10-year Treasury yield spiked to a 3.25% — its highest level since 2011.
When rates get this high, it raises the likelihood of tighter monetary policy, which can eventually trickle down to cap company profits and dividends. Higher rates hurt stocks by making bonds more attractive than stocks.
In addition, it can also make it expensive for companies to borrow and invest.
That’s what spooked the market in the worst month of the year.
“We don’t know who is to blame here; it’s a little like trying to find what or who is responsible for the dangerous hurricane in Florida,” says Chris Rupkey, chief financial economist at MUFG, as quoted by USA Today. “But make no mistake about it, the stock market decline, triggered perhaps by rising bond yields, is just as dangerous.”
So, what should an investor do about the stock market drop?
The best thing to do is sit tight and do nothing.
For one, markets are resilient. The last time the markets fell like this was January 2018. Markets plummeted nearly 1,200 points. Soon after, the market recovered and hit new highs.
Two, use the pullback as opportunity to trade resiliency.
As Warren Buffett would advise, “Be fearful when others are greedy and greedy when others are fearful.” Or, as Sir John Templeton would advise, “Buy at the point of maximum pessimism.” Or even as Baron Rothschild would tell you, “Buy the blood in the streets, even if the blood is your own.”
That’s because fear often breeds opportunity.
Three, remember the economy is still strong. Unemployment is at a historic low. Consumers and businesses are confident. GDP is above 4.2%. Even company earnings are expected to show continued progress.
As noted by MarketWatch, “Third-quarter earnings will be a major driving as companies report over the coming weeks. According to FactSet, analysts are looking for earnings growth of about 19% and sales growth of 7%.”
In short, don’t’ allow market pullbacks to scare you away from the markets. Instead, sit tight and remember just how resilient markets have historically been.