Today’s Headlines: US Stocks Plummet

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Today’s Headlines:  US Stocks Plummet
August 25, 2015
Dow Reaches Correction amid Massive Stock Sell-off

Over its last six trading sessions, Wall Street finally corrected — and how. Friday was the worst day for blue-chip stocks since August of 2011, with the Dow Jones Industrial Average falling 531 points. Tack on a steeper drop of 588 points Monday, August 24, and the total carnage over the past six trading sessions is nearly 1,600 points.

This represents a 12% decline since the market peak of 18,312 on May 19th, meaning the Dow is now officially in a “correction” phase. (Any drop of 10% or more in a bull market is considered a “correction”.)

The broader US equity markets also bled. In the past two trading sessions alone, the S&P 500 fell 142 points, while the NASDAQ tumbled 351. NASDAQ is now down 11.1% from its latest peak, joining the Dow squarely in correction land. The tech-heavy NASDAQ's retreat is being led by Apple (NASDAQ:AAPL), which moved beyond “correction” into bear market territory by closing at $103.31 today—a full 21% off of its peak earlier this year. Well over $1 trillion in US market value was erased over the Thursday-Monday free fall.

Global stocks sold off broadly as well. The Shanghai composite fell 4% on Friday and another 8.5% today, meaning it has now plunged over 38% in 2015. (However, the Shanghai is still 43% higher than it was one year ago, which illustrates just how volatile the Chinese equity markets have been.) Japanese stocks, meanwhile, fell 3% on Friday and 4.6% today, while the STOXX Europe 600 lost nearly 7% in the past two trading sessions.

Many reports pin this massive pullback in equities on three words: China, Oil, Fed. Chinese economic concerns, low oil prices and shaky demand, and the inevitable interest rate increase by the Federal Reserve have investors in a gloomy mood and looking for a reason to sell. Other reports cite continuing Greek instability as a factor, with the resignation Friday of Prime Minister Tsipras triggering a call for new elections there. While all these factors are clearly affecting the timing and severity of this global retreat from equities, there is an argument to be made that this correction was long past due for a host of fundamental reasons.

An Overdue Correction

The long and strong bull market has dulled some perspectives on stock market corrections. Historically, they tend to occur around once every 18 months. It's been essentially four years since the last correction in the fall of 2011, which was fueled by the debt-ceiling crisis. There have been a few significant drops since then periodically to bleed off market enthusiasm, but nothing reached correction level until Friday.

Stocks have been arguably overvalued for some time. Stock prices have continued to rise out of proportion with earnings reports — revenue alone did not support current prices. Combine that with prolonged low oil prices (which fell below $40 per barrel for US benchmark crude), and a highly anticipated interest rate increase by the Fed, and the market was primed for a sell-off.

China provided the initial catalyst with a devaluation of the yuan last week, prompting concerns that China's economy was in worse than expected shape. A poor manufacturing report sparked the Friday decline and propagated the effects throughout Asian markets and on to Wall Street's opening bell. The preliminary August Caixin purchasing managers index, a measure of China's manufacturing growth, came in at 47.1, the lowest level since March 2009. Collective market fear was reflected in the CBOE Volatility Index (VIX), which reached 28 — more than double the previous week's value.

One bright side for investors may be a reluctance of the Fed to raise rates in September as most analysts had predicted, although artificially low rates are arguably part of the reason stocks were overvalued. Market forces should be driven by reasonable estimates of earnings and growth instead of incessant speculation on the Fed's actions.

Fundamentals versus Expectations

It's hard to envision this drop as the beginning of the Great Recession Part Two. The fundamentals are not in great shape, but they aren't in extreme danger territory, either. Price to earnings (P/E) ratios are elevated but not at the levels seen prior to previous bubble crashes and bear markets. The housing market is finally beginning to show sustained recovery, and is hampered more by an inventory problem than anything else. US GDP was up 2.3% in the second quarter and the first quarter loss was revised to show a slight expansion of 0.6%. Consumer confidence is down a bit but not to the level that indicates future trouble.

The real concern is where future growth will come from, since consumer spending is not robust enough yet to drive demand even with low gas prices. Stock buybacks and mergers will still continue to pump up P/E ratios, but in the end, everyone realizes that true earnings growth must drive the market. Second quarter earnings reports were mixed and third-quarter projections were lukewarm at best.

China held promise for being the world's growth market, and the one-two punch of a devalued yuan and poor growth indicators have greatly decreased these expectations. Analysts are starting to wonder how much of the Chinese economic growth is real and how much is a debt-driven, government-obfuscated mirage.

The Takeaway

The market might continue selling off, as the psychology is clearly skittish right now. However, it’s anyone’s guess as to whether a full-blown bear stampede is imminent. If equity prices do continue falling, look for bond prices to rise as investors seek refuge from stocks. The psychology of the sell-off is still in motion.

On the other hand, this correction might be short-lived as the fundamentals of the US market are still relatively strong. Both job and income growth are solid, interest rates remain low, while most major companies have healthy balance sheets and strong cash reserves. Consequently, the market may soon find a bottom and begin a slow recovery. China does not appear to have control of its economic situation yet, and the current state of both the Chinese and global economies is likely to keep any US recovery muted. Nonetheless, we believe the US market will reach a new equilibrium and begin the recovery process sooner, rather than later.

Broad sell-offs offer good buying opportunities for stocks that are still solid but dragged down temporarily by collective market forces. If it fits within your risk tolerance to buy during a downturn, there should be bargains available soon that will prosper in the longer term, even if they continue to slide in the short term.

If you do choose to go bargain hunting, keep your purchases within your established rules for diversity and total risk tolerance. If you cannot bring yourself to buy during a falling market, at least resist the urge to dump stocks completely. Avoid panic selling and seek partial refuge in cash, bonds or real estate. Then, during the recovery period, assess the damage to your portfolio and see if your diversity strategy served you well. If not, go forth and rebalance.


Photo ©iStock.com/Morrison1977

  Conversation   |   41 Comments

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Erin | 08.25.15 @ 17:12
Good advice. The variability of the market is all part of the risk involved with this type of investing. I don't think it's time to panic yet.
Victor | 08.25.15 @ 17:27
It is great to know how to manage your self in the stock market especially during recession.
Alec | 08.25.15 @ 17:30
This article is a little too technical for me. Thankfully I don't deal in stocks. Although it makes me wonder what kind of ripple effect it'll have on the economy as a whole.
Elaine | 08.25.15 @ 17:36
Been hearing talk about this possibility for months now. Everyone kept saying it will start in Sept. Well they were close. Something to keep your eyes on if you are a major investor.
Britt | 08.25.15 @ 17:47
I liked this article, it had a good amount of advice and tips.
Christina | 08.25.15 @ 17:52
Makes me worry about my 401k performance... sigh
Christina | 08.25.15 @ 17:58
Stocks are somewhat like gambling... Some days you win some you lose, learning how to manage what you put in good advice..
Zanna | 08.25.15 @ 18:09
Best to look to the long term, and not panic over daily fluctuations. The market seems a lot like a bathroom scale to me, it's better if you don't look at it every single day and obsess over the ups and downs..
Kamie | 08.25.15 @ 18:22
This is really some great tips, and I am bookmarking this. I have stocks, but never really tried to do research on it.
Bobbie | 08.25.15 @ 18:24
There are always ups and down with the stock market. We always invest a little at a time and over the years our portfolio has performed well. No need to panic.
Daniel Dohlstrom | 08.25.15 @ 18:37
I personally take bad days ( or at least try to) with a grain of salt. The market is like a living thing there will be ups and downs. Do your research and try your best to make the right choices of what to stay with and what to loose.
Sara | 08.25.15 @ 18:47
I have always been skeptical of putting money in the stock market. Though with the way things look I will not be investing in it anytime soon.
Sarah | 08.25.15 @ 18:57
I heard about the recent stock market issues but this helps to clear up some of the confusion as to what it all means.
Nancy | 08.25.15 @ 19:04
This was helpful for me to understand not only what happened in the market over the last few days, but in the market as a whole.
Chelsey | 08.25.15 @ 19:10
I have always felt like the stock market was too much like gambling. Yes there are trends and you can base it off certain factors, but there is still risk involved. Makes me nervous to think about investing in our markets the way they are.
Irene | 08.25.15 @ 19:12
I'm not invested in the stock market but how it affects me when it falls drastically is to make me panic that we are headed for another recession. I barely struggled up out of the last one and when the market began to fall and fall I didn't really pay it much mind until eventually businesses closed down and my husband was out of work for a year
Apryl | 08.25.15 @ 19:15
I honestly never considered the impact of this on me before!
Crystal | 08.25.15 @ 20:35
I've been hearing about this for a while now. Interesting food for thought.
trish | 08.25.15 @ 20:59
Afraid to delve into stocks...need to have tons of information, and feel better about what I am investing in...
Rindy | 08.25.15 @ 21:54
The stock market instability worries me. I think it is a direct reflection of the economy.
Jackie | 08.25.15 @ 22:19
Great article. I've always felt investing in stocks is risky. This has been expected for some time and now it seems to be coming to pass.
Heather | 08.25.15 @ 22:26
Playing the stocks is not for everyone. But I do know now is a good time to buy while the stock prices are low.
Ron | 08.25.15 @ 23:02
My losses were regained, today. Well, mostly. That said, China manipulates its currency and is in a bigger predicament then we are. But they will do they deem necessary what they need, then do it!
Andrea | 08.26.15 @ 00:11
Interesting article. Maybe some day I will learn to play the stocks.
Steffanie | 08.26.15 @ 00:36
Some great advice in this article.
Wanda Langley | 08.26.15 @ 01:10
Great advice. I no longer buy stocks but this is good advice for anyone who does.
Beverly | 08.26.15 @ 01:26
The downward trend has been long overdue and the stock market has been artificially propped up. You can only do that for so long. Good read.
Leah Gardner | 08.26.15 @ 02:27
Man,this flew over my head. But I worry about the trickle down affect. This is some how going to affect everyone. Even if you don't deal with investments
Angie | 08.26.15 @ 02:34
This is a very thorough presentation of the effects of the recent stock market dip and the events leading up to it. Great information for the new or casual investor as well. Better information helps to defray the tendency for some investors to panic, making a bad situation worse.
gracie | 08.26.15 @ 02:56
I haven't bought or traded in stocks in several years now and while it was great to see the plunge rise again quickly I still am not confident that economy is truthfully stable or going in an upward direction. I understand and hear what the news has to say but that is not the reality that I see all around me.
Crystal | 08.26.15 @ 03:27
I think you need to wait it out. The market goes up and down and for the long haul you will make money
Crystal | 08.26.15 @ 03:28
You should wait it out. Leave the money in. It can go up and down and over the long run you will make money
Rychana Vingia | 08.26.15 @ 04:17
I've never really followed stocks. I have heard too many stories of people losing money.
Vaughn | 08.26.15 @ 04:39
This stuff causes me anxiety.
Blake | 08.26.15 @ 14:50
I wonder how long it'll take everything to balance back out. We don't need another economic blowout. Most people are still trying to recover from the last one.
Katie Greene | 08.26.15 @ 22:12
Wow. It's scary to see how everything can just go in a sudden market crash
Carla Truett | 08.26.15 @ 23:05
It really pays to get someone who is really knowledgeable in stocks to help you invest and that is still no guarantee that your money is safe.
Debbie | 08.27.15 @ 04:42
This explains what I keep hearing about the last few days but is above my understanding in many ways. I never have understood the stock market.
Jane | 08.27.15 @ 04:57
Something stirred the stock market pot, but the market did not continue going down, so there is confidence in the market.
Sierra | 08.28.15 @ 14:08
I wish I knew more about stocks.... If there was an interesting way to learn more I'd be all over it....
Stokes | 08.28.15 @ 20:10
I casually keep up with the stock market. I have stocks, but most of my money is conservatively tied up in mutual funds.
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