The world is not ending. Stocks went down ~10-12% on the week. Oil went from $52 to $45/barrel. Gold went from $1,666 to $1,587. Bonds went up about 2-3% this week. What will happen next, truthfully no one knows.
Instead of what is the reason, you have to realize the Stock market is a psychological phenomena. People tend to over react to bad and good news. There are multiple interesting events this week.
More likely what we are seeing this week is a combination of issues:
Stocks were priced for perfection. Prices were ~20% too high (in my opinion) for earnings. China the second largest economy unable to export goods will hurt sales all over the world.
Automatic trading and momentum investing deserve some blame. During the run up momentum investing was developed to keep buying winners. When the stock market adjusted lower the same algorithms keep selling. The effect of automatic trading is to amplify ups and downs in the stock markets.
Speculators having to cover losses. People with options have to sell other holdings including precious metals and commodities to pay for their losses.
Corona virus is all over the news, but 80% of cases are mild and only ~2% of cases are fatal. Mostly fatalities are senior patients with other existing. My expectations are the number of cases and countries will grow. Flus are very contagious. But a flu shot will likely be available in time for fall, quarantines are working to contain breakouts, and countries with modern medical facilities will be able to treat patients successfully. In a year this should be over.
Bernie Sanders surprised Wall Street who discounted his run to be the Democratic nominee. His proposed policies and higher taxes on the wealthy will lower profits and stock prices. Most Wall Street analysts believed President Donald Trump will be reelected against a moderate Democrat. But Bernie Sanders’s popularity and early primaries results are creating election doubts. He is as popular with the same blue collar voters as the President.
BTW if Democrats did not have Super Delegates, Bernie Sanders may have beat Donald Trump for President. Senator Hilary Clinton ran a terrible campaign. At this point he is tracking like President Trump did through early primaries leading to his nomination. He is likely to win.
So we know what may have triggered the stock sell off this week. What should we investors do?
First option is do nothing. If you have a diversified plan, it will survive this pull back. My investments are down ~5-6% this week, because have about 50% stock, 40% bonds and 10% commodities/precious metals/REITs. The non-stock investments went up lowering my losses.
If you have 80% -100% stocks, consider moving some of your money to bonds or other investments. The decision is not all or nothing, but to be more aware of other choices like bonds or CDs. Remember, what you lost this week is much less than you gained over the last 3 years. We can also work a few more years before retiring.
No one knows what the stock market will do next week. May go up, continue to fall or stabilize at the new levels. But over years stocks typically grow. Our retirement funds buy stocks every month. Long-term stock prices will go back up.
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