I don't usually call on my 40 years of investing experience to comment on stocks - but today (10/10/18) was no normal day. Wednesday’s market rout was the worst day since the bloodbath in February.
- The DOW lost 832 points – a 3.17% plunge
- That’s the third worst one-day fall ever
- That put it at 4.4% from its highs.
- It closed below 25,600 – a critical point, after opening the day above 26,400
- The S&P 500 is down 3.3%, and has lost almost 5% from its highs
- This is the first time it has closed down 5 sessions in a row since Trump was elected
- The NASDAQ was hardest hit, dropping 8% from ten days ago
The big losers were Sears (down 30.3%); Tiffany (down 8.5%); Altair Engineering (down 7.5%); Estee Lauder (down 6.1%); and Nike (down 4.7%).
Most of the pundits were predicting an up day after Wednesday's disastrous trading session. I thought we would see more of the same but to a lesser degree, and that was the case. I won't give you the statistics for Thursday except to say that the DOW plunged 546 points or 2.13%. That made it the fifth largest point drop this year. The other indices suffered similarly.
Many traders called me Thursday after the close, asking if we should expect more blood on Friday. I told them to expect a "Dead Cat Bounce" on Friday. I was so sure of that that if I had been in the market I would have bought calls on Thursday before the close.
In case you're wondering, a dead cat bounce is a trader term indicating a bounce following a steep drop. As the saying goes, "Even a dead cat will bounce a little if it's dropped from a height." The Dow did bounce 1.15% on Friday, slightly more than half of the points it lost in the second down day. That was a gain of slightly more than half of the previous day's loss, and just one-fifth of the two-day loss.
DISCLAIMER: No cats were harmed in the writing of this article.
What does all this mean? First, we have seen an unprecedented rise in the stock markets due to Trump’s election. It started when he won the election, not when he took office. That means that a large part of the increase was based not on what he had done, but on what the market thought he would do.
So a lot of the rise has been on market sentiment (or expectations). Then Trump surpassed expectations by passing tax cuts and negotiating great trade deals for the U.S. These, in turn, resulted in some of the best jobs numbers in decades, and a record number of new businesses and manufacturing plants opening. All that, of course, bumped sentiment even higher.
But what goes up must come down. There has never been a market of any kind in any country in any century that just kept going up. That will never happen. The White House announced after the market close today that this drop was “probably a good thing.” That’s true. Unless you want devastating crashes such as we saw in 1929, 1987 and 2008, you must have smaller corrections along the way. Without them, when the crash comes - as it always does – its scope is greatly magnified. In other words, “Look out below!”
The most important thing to remember is that this week’s market action was just one of a series of “jolts” the markets have been experiencing. Together they add up to cracks in the foundation of our various stock markets.
A few months ago I gave our president some unsolicited advice. He was bragging about how the stock market had risen because of him. I said that he should take credit for reducing unemployment, taxes, and burdensome regulations. He should also take credit for his trade negotiations. Those are all things he could – and did – affect.
But the president cannot make the stock market go up. As we have seen, the excitement he has created has encouraged people to invest, putting more money into the markets. But the markets respond to forces much bigger than any president. And when they decide to dive, there is not a thing the president can do to stop to flow of blood.
So I said he should not take credit for the market going up, because then he would “own it.” And when it crashes, he will be held responsible for it. It doesn’t matter that he can’t actually make it move in either direction. He has created the perception in many people’s minds that he can, so he will be blamed when it drops.
I have directed the investment of many millions of dollars in stocks and options. I have personally held significant positions in companies that I researched thoroughly. Today I do not own one share of stock.
I can’t tell anyone what they should do. But it's OK to say what I would do if I owned stocks today. I would eliminate or reduce the number of stocks, mutuals funds and any other “paper” investments I owned that were valued in U.S. Dollars. And if I had those investments in retirement accounts, I would exercise my option to go to cash.
With the inflation the U.S. continues to experience, I am not a fan of cash, because it loses value daily through inflation. But today I would much rather be in cash than paper assets. And I would far prefer to be in hard assets (Gold and land) than in cash.
I’m just sayin’.