Why last night’s market correction is good news for smart investors

Posted: August 1, 2014 in Business Management
Tags: , , , , , , , , ,

1929 it ain't. Relax, people.

1929 it ain’t. Relax, peeps.

“Wall Street hammered, Dow closes down more than 300 points!” screamed the headlines.

And stocks did indeed get slammed on Thursday, with the Dow Jones Industrial Average ending the day down 1.87%, at 317 points in the red. The drop wiped out all the benchmark average’s gains for 2014, and put an end to a five-month winning streak for stocks. This was the Dow’s largest point drop of the year since February 3; percentage-wise, it’s the worst plunge since April 10. At 16,563, the index is well below the all-time closing high of 17,138 hit just a couple of weeks ago.

Additionally on Thursday, the S&P 500 saw a 1.89% drop to end at 1,932, and the Nasdaq fell 1.98%, ending at 4,374.74.

So what’s going on? Well, Yahoo Finance editor Phil Pearlman says those looking for easy answers are going to be disappointed. “Over the last 25 years, stocks have their worst month in August. This is the worst time of the year, and we’re getting a preview of that on the last day of July.” Why? Your guess is as good as the experts.

Oooops.

Oooops.

Experts believe the selling was triggered by a variety of factors. To add to the long-standing laundry list of troubles in Ukraine and violence in the Middle East, Argentina failed to reach a deal with bondholders and defaulted late Wednesday. Argentina’s benchmark Mervel index dropped more than 6.5%.

The employment cost index in America also posted its fastest rise since 2008, stoking fears of inflation and chatter of an earlier-than-expected Fed rate hike. There are suggestions of interest rate rises elsewhere too. More expensive money always stokes sell-offs of companies that are highly leveraged or involved in market sectors that respond poorly to interest rate rises such as housing and building.

Though the US selling was intense, there was little evidence of the panic that typically marks the end of selloffs. After years of being rewarded for buying every dip, investors seem conditioned to treat corrections as buying opportunities, though little buying was apparent as of the close. So is this the correction that canny investors have been waiting for?

“I have no idea; my best guess is that [it is]” said Pearlman. “But if we get a 4%-5% pullback,” he continues, “the resulting “panic” could lead to a bottom, which will provide an attractive entry point for some investors with cash ready to put into the market.”

Yahoo Finance’s Jeff Macke commented, “If you’re too nervous to sleep tonight, you’re too long stocks. Trim a little gains if … you’re already nervous. If not, ride it out. This is the way markets are supposed to behave.”

Or to put it another way, if you expect the stock market to always go up, you should probably be investing your money on the gee gees or bingo.

Get ready to buy value. Always look for a track record, good management and good value. As always.

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