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I’m going to get right to it with a special edition of “In Market News” as I have a lot to do this evening for the little ones. It’s the holiday season, the night before Christmas and everyone is supposed to be full of cheer…not so for the stock market. Today was the worst Christmas Eve sell-off ever recorded, the S&P 500 just went into a bear market and the NASDAQ entered one the other day. A bear market is when the index plummets at least 20% from its most recent high. There’s a lot going on so I’ll try to summarize it then follow up with technical levels to look out for.
First and foremost the Federal Reserve is pulling back significantly on the program that pumped the market up and helped get us out of the Great Recession. In addition, they are raising interest rates and did so again last week. The market was hoping they would not raise and scale back interest rate hikes for 2019. Instead, they said they are raising twice and did not do a good job of reassuring investors that it will be data dependent and monitor the financial markets.
Next, we have a continued circus in the current administration. The President is seen causing another government shutdown, the constant revolving door of high-level officials and appointees, the trade war between the US and China, the Treasury Secretary making comments about liquidity in the banks (which many thought he should have never mentioned) spooking the markets, as well as many other issues.
Finally, we have been in a late cycle bull market with a slowing world (and US) economy and many fearing that a recession is on the horizon. The stock market is forward looking meaning that it tries to anticipate the future. If it feels a recession is a year or so away it will start selling off early sending us into a bear market. With a bear market stocks go down most days but will sometimes have sharp, violent rallies.
For you short-term traders out there here is a look at the technicals. Today the S&P 500 closed at 2,351, down 20% from the all-time high of 2,940 hit in September. The 2,300 level is another area of support but if we can’t hold it than we could have a long way further down to go. If we hold and bounce then I would sell any short-term positions around 2,500 and look for a retest of whatever level we bottom out at. We broke out to new highs back in April, 2013 and some think we could revisit somewhere between 1,575 and the 1,900 area in the next 1-2 years. Approximately 1,576 was the level we broke out from which was the prior high of the last bull market ending in October, 2007.
Once the market breaks down 20% or more it takes quite a bit of time to recover. We’ve had instances where we sold off that much or more and were not in or heading into a recession. If we made it all the way down to those levels mentioned above that would be more than a 45% decline, in line with prior bear markets combined with recessions. Although the economy is slowing, most US companies are doing well, we’re almost fully employed, consumers are spending, and the widely followed 2-year/10-year yield curve hasn’t inverted yet.
If you have a 401k the best thing to do is to stay the course and keep contributing. The stock market will recover and eventually make new highs but it will take some time. Depending on your age you should always be mixed in stocks and bonds. The general rule is to take 100, subtract your age and that is the percentage you should have in stocks. The left over should be invested in bonds. History has repeatedly shown us that it does not pay to trade in and out of 401k’s.
Please visit our website at www.LegacyInvesting.net and contact us today for a FREE consultation on becoming financially fit and learning how to make money investing in the financial markets. You can make money in ANY type of market (bull or bear). When we meet I’ll give you more information about our services and find out what your financial goals are. If I can help you, we can move forward; if not, no problem but I’m always just a phone call away from any questions or quick advice you want. Step out of your comfort level and get your finances in shape this year! Let’s connect and build generational wealth together. Have a wonderful Christmas and I wish you a Happy New Year!