To say the stock market was due for a pullback is quite an understatement. The last time the S&P 500 has had a drop of any significance was back in early August of 2019, when it dropped over 6% in about a week. It took about 3 months to regain that loss and has marched steadily higher, for the most part, until today.
Markets never drop just for the sake of dropping. There is always a catalyst. Right now, it looks like the spread of the corona virus is causing the markets to panic. And in today’s high-frequency, computer-driven trading algorithms, the selling is amplified and accelerated, much like a snowball rolling downhill. This action is a classic pattern, best described by one of Wall Street’s many adages: stocks take the stairs up and the elevator down.
Everybody always says that pullbacks every once in a while are healthy for markets and they are right, but it still never feels good. Still, there are actions that you can take when these drops occur. If you’re a trader (that means not a long-term investor), hopefully you have taken some money out of the market during the recent rise just for times like these where you can buy back in at a lower price. For the rest of us long-term investors, sticking to your plan is the way to go. Any money that you might need in the next one or two years should not be in the stock market but somewhere safe and readily available. The rest should be in a diversified portfolio that matches your risk tolerance. For those contributing to a retirement plan every paycheck and are properly diversified, you love these dips because you are buying more shares for the same amount of money coming out of your paycheck.
I would expect to have more drops this year like the one we’re having today, especially with the elections coming up in November. The good news is that the economy is still doing decent but the best news for stocks is that interest rates are still extremely low, which means that stock sellers in these market drops will realize their mistake and buy back into the stock market. This keeps a floor under stock prices.
As always, be prepared and have a plan.
Joe Baker, CFP®
Baker Asset Management, LLC
joebaker@bakerassetmanagement.com
