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Today was an unprecedented sell-off in the stock market and I wanted to try to explain it for those who are wondering what’s really going on. I realize we have newer investors here and I want to first explain what these stock indexes are that you may hear about on the news. The Dow Jones Industrial Average or better known as the DOW is a stock market index of 30 large US companies and is one of the 3 largest indexes. As you may know the other two are the S&P 500 and the NASDAQ Composite. Briefly, the S&P 500 stands for the Standard and Poor 500 and is another index based on the market caps (the market value of a company’s outstanding shares of stock) of 500 large US companies listed on the New York Stock Exchange or NASDAQ stock market. The NASDAQ Composite is the newest stock market index that is also widely followed and trades on the NASDAQ stock market.
We had what some may call a flash crash and it is becoming more and more common in modern day trading, partly because we have a lot of automated and algorithmic trading often moving huge amounts of money. Stock prices are based on supply and demand meaning that when everyone is fearful and selling their stock it causes a large amount of inventory to flood the market. When no one wants to buy the inventory then the prices have to drop. When still no one is buying the prices drop further and further. It’s almost like a snowball rolling downhill. As it moves down it gets bigger and bigger, moving faster and faster. Today at one point the DOW had dropped almost 1,600 points which numerically is the biggest drop in history. Sounds like a big move but to put it into context, the DOW has gone up almost 7,000 points since last January so it just sounds scary and makes a great headline. The amount of points is not as important as percentage moves, which is really what affects your money and 401k values. That intraday move of 1,600 points lower was around 6% which is a big one-day move but it pales in comparison to the biggest percentage move in history which happened in 1987 as the DOW fell 22% in one day! If that were to have happened today that would be more like an almost 6,000 point decline! Thankfully, new protocols have been implemented so that type of decline doesn’t happen again, at least not in one day.
In some of my earlier blogs I have mentioned that we have gone a really long time without a correction or significant stock market pull-back. A correction is defined as at least a 10% move lower (peak to trough) and anything up to that percentage is a pull-back. So far the DOW has actually had a 10% correction and the S&P 500 is very close to that. We may fully get it tomorrow as the futures (the level the market may open at in the morning) are indicating a lower open once again. Without going into all the reasons why we dropped, this decline was way overdue and really is something that is needed in healthy markets. Here are the reasons I think it’s short lived:
- The world economy is still recovering
- Unemployment is at record lows
- Wages are starting to expand
- Corporate profits are exceeding expectations
- The tax cuts haven’t been fully factored into upcoming company earnings
- Personal tax cuts will encourage more spending which will continue to boost our economy
- Infrastructure spending package likely in the next few years
I think this is a good time to get in the market and I see a higher stock market later this year. To further explain why this decline was necessary here is a picture of the S&P 500 with a few technical levels I added. Think of this chart like a hockey stick. When you see the right side of that stick curving up really high it’s only a matter of time before you get to the end and fall off lol. I believe we are either coming down to the 200-day moving average (a widely followed technical level) or the bottom of the red trend line that I drew (in between the yellow 50-day moving average line and the 200-day moving average) or even somewhere in between.
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 prosperous week!