How To Handle Market Mayhem

Posted: Feb. 7, 2018, 10:52 a.m. by

Market Mayhem


The recent stock selloff in the U.S., Europe and Asia resulted in all 3 regions giving up their 2018 gains after two days of trading. Hedging only slightly, Tim Anderson, managing director at TJM Investments said, “This is the first time in a while I’d say it feels like borderline panic-type selling.” That near panic, which led to yelling on the floor of the New York Stock Exchange, was something not seen since Brexit vote according to Anderson.

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Pause Or Plunge

Following a strong start in the new year, the recent stumble could represent the “correction” many have been expecting or a mere “pause” as the market stops to take a breath. The “market,” really the collective actions of investors, is anything but predictable and in this case the reasons behind the drop could be many.

Some investors fear low inflation and low interest rates are about to end with the appointment of a new Federal Reserve chairman whose long-term policies are unknown. While inflation remains low, recent jobs reports show U.S. wages rising to their strongest rate since June 2009.

Bond Levels

Treasury bonds are rising. The benchmark 10-year U.S. Treasury note was at its highest level since January 2014 Friday at 2.819%. Yields tend to fall as bond prices rise and borrowing becomes more expensive for businesses. Many investors, however, think stocks will continue to do well in 2018 since overall interest rates and government bond yields globally remain historically low. Stocks typically rise alongside bonds as the economy strengthens.

Helping to shore up sentiment among investors is the fact that about 80% of S&P 500 companies have reported Q4 sales that beat analysts’ expectations. This could lead to the most positive surprises since at least 2008 according to FactSet.

Panic Selling

As opposed to rational selling to take a profit or as part of an overall trading philosophy, panic selling happens when investors sell out of fear and just want to get out of their investments. Panic sellers typically don’t care what price they sell at. They just want out.

The main problem with this is that behavior is driven by emotion and fear and not by the evaluation of fundamentals. Market crashes are the inevitable result of panic selling. This is so important that most major stock exchanges use trading curbs and halts to limit panic selling. This forces people to digest information on why the selling is happening and provides time to restore normalcy to the market.

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Steps To Take

When the market seems unstable, the first thing savvy investors do is take a deep breath. Most avoid panic at all costs and for the most part stay the course. Selling everything and leaving the market will likely result in losing out on potential gains in the future. History says there will be gains in the future. Many investors watch carefully for buying opportunities. Buying the dip plays into the age-old maxim: buy low, sell high. The best advice analysts give is to be selective. In the current climate some experts believe financials, health care and industrials all represent good growth opportunities.

If the market rebounds from the current turbulence, it may take time. There may even be further declines. For this reason, experts suggest taking something of a wait and see approach. In other words, don’t jump in any direction immediately. Finally, given the fact the U.S. has seen 125 corrections of 10% or more since 1900, it’s important to realize this is a movie many have seen before.