5 Reasons Why the Dow REALLY Fell 760 points (And What to Do Next)
Monday’s hair-raising 760-point Dow caught a lot of investors by surprise.
I got asked, “Why is this happening??!!” more than once, via email, text, and in person.
Surprisingly, there’s a very simple explanation.
First, believe it or not, headlines have nothing to do with the decline. Rather, they’re an attribution – meaning the media loves a good story. So, logically, they’ll come up with one like they did when the Treasury Department designated China a currency manipulator.
Second, passive investments now account for 60%-65% of all equity assets, which means that the major averages are a) increasingly sensitive to headlines and b) going to experience more frequently and sharply more violent price swings. Another 20% of the markets are controlled by trend-following models. All told, that’s roughly 80% of the market operating without human control.
Third, public markets are shrinking. The number of public companies fell by half from 7,300 to 3,600 from 1996 to 2016 according to Credit Suisse. In 1996, nearly 700 filed to go public yet, by 2017 there were barely 100 according to the CFA institute and CNBC. So there’s a constantly increasing amount of money, chasing fewer and fewer quality stocks, which is why, to a point I make frequently, quality matters.
Fourth, the world’s best investors buy nearly the same stocks. Conventional wisdom says you want to buy the stuff nobody’s heard off – and that does have a role in your portfolio – but the reality is that the best and biggest profits go to those who buy the most favored stocks. Believe it or not, this is a much more useful metric than valuation at the moment with funds holding “top-tens” beating the markets 63% of the time according to billionaire investor Ray Dalio and Institutional Investor.
And, fifth, computerization now accounts for 60% of total stock market volume on “normal” days – if there is such a thing anymore – and can account for upwards of 90% when the you-know-what hits the fan. So big blocks trade quickly and more violently than humans can keep up, which moves prices very quickly and swing far more widely than they used to.
Now, here’s what can you do about it.
Contrary to what many investors think, all is NOT lost.
In fact, the things I’ve just highlighted can be a tremendous advantage for individual investors seeking an edge. That’s because the big boys have to move their money daily to keep in sync whereas individual investors can be very selective about what, where, and how they buy.
Simply put, you want to do what’s good for you no matter what the markets are doing.
Right now, that means paying careful attention to the trailing stops I talk about every week in our paid sister services, and here at Total Wealth. It means taking profits when you have them. And, most importantly, it means buying into the world’s best companies, as long as the business case for buying ’em remains intact.
Think about Monday’s buzzcut and the subsequent drops later in the week trading this way.
You’re not losing an opportunity when there’s a big drop; you’re simply gaining a chance to buy something really good, for a lot less money.
Big tech, for example, is already recovering, or at least stabilizing. Companies like Amazon.com Inc. (NasdaqGS:AMZN), Microsoft Corporation (NasdaqGS:MSFT), and Alphabet Inc. (NasdaqGS:AAPL) are all capable of overcoming short-term selloffs because of what they do, how they profit, and what they mean to the world we live in.
Defense stocks like Raytheon Co. (NYSE:RTN) and Northrup Grumman Corp. (NYSE:NOC) are quite literally “defensive” as markets tank because they’re backed by hundreds of billions of dollars in long-term contracts and complicated geopolitics. Many trade for less than 15X earnings at a time when the S&P 500 Index trades at 21.46X, according to Multipl.com. This means they’re comparably inexpensive.
So, too for certain medical stocks or even specialized energy players at a time when the world’s needs are quite literally changing in front of our eyes.
I hope you see my point.
There will always be time to buy… it just may not be today and it may not be at the opening bell!
As always, I will be with you every step of the way.
Speaking of which, please click on the following link if you’d like to learn more about the Money Map Report, and how it can help you profit in all sorts of market conditions. It’s easy to understand, easy to follow, and actionable with precise buy/sell/hold instructions, updated weekly, by yours truly.
Until next time,