Panic on Wall Street: Here’s Your Survival Guide
Inflation fears sent the Dow tumbling 2,000 points this week, erasing 2018’s earlier gains and sending Wall Street into a panic.
Before we go any further, I want to reassure you that I’m keeping a very close eye on these developments.
It’s crucial to remember what we’re seeing right now is a normal healthy correction. Markets are cyclical. They have and will always be.
Today, I’ll cover what this week’s meltdown means in the big picture — and where I see it heading next.
Read on below…
Easy Come, Easy Go: Inflation Fears Spark 2,000 Point Dive
The stock market posted an absolutely stellar first month of the year with the Dow Jones Industrial Average zooming nearly 8% higher in January.
Investors were keen to jump aboard the express train to the upside with record money flows of $100 billion going into equity mutual funds.
But alas, those late-to-the-party buyers got run over by a freight train last week.
The pain continued into this week too. The Dow took back-to-back dives of 1,000-plus points this past Friday and Monday, starting February off on a very sour note for investors.
Easy come, easy go as they say.
Of course this sudden reversal of fortune prompted many readers to flood my inbox with questions about the fate of the market. Summarizing many messages, the gist of it was:
Is this the beginning of the end for this long, overdue correction, meaning a good buying opportunity?
Is inflation out of control and are we witnessing the beginning of the end for this long running bull market?
I believe the Dow’s swan-dive will most likely mark the end of the BEGINNING of a steeper correction for stocks, meaning there is likely to be more downside in the weeks ahead.
However, I also believe this correction is not only long overdue, but healthy for the stock market.
And yes, will be a decent buying opportunity for eager investors.
First, let’s keep the proper perspective by understanding just how overdue this correction was to begin with.
Remember this number: 428
That’s how many days it’s been since the stock market last experienced a decline of 3% or more. That’s nearly a year and three months ago!
And if you take a closer look at the data on the S&P 500 stretching all the way back to the roaring twenties, you’ll find that pullbacks of this magnitude are fairly common.
In fact, historical data shows us these corrections have occurred approximately seven times per year on average, according to Bespoke Investment Group.
Clearly, the market had a correction coming at some point.
Here’s another measure of how over-extended the stock market had been in January.
The S&P climbed 14% above it’s long-term trendline, as measured by the widely followed 200-day moving average. That’s nearly four standard deviations above trend. A very rare overbought occurrence.
Remember what I’ve said about the mean-reverting nature of financial markets?
What goes up must eventually come down.
All that was needed was a spark to ignite a correction and we got it in spades with the latest inflation data.
Last Friday’s payroll report showed average hourly earnings are up nearly 3% year over year. This is the fastest pace of wage gains in nearly a decade, stoking the growing fears of inflation.
Treasury bond prices have been plunging for the same reason with yields moving in the opposite direction. The 10-Year T-note yield surged to 2.8% yesterday, up from just 2.1% in September, a monster move.
Ironically it’s the Fed and other central bankers around the world who have been desperately trying to spark inflation for years.
Well, now they have it. Be careful what you wish for.
But where do markets go from here?
Here’s the script I expect stocks to follow going forward.
Some real damage has been done to the technical picture of the stock market. And I doubt that stocks will immediately rebound to new record highs.
That leaves us with two likely scenarios.
Examining the last two weeks, and how quickly the market went from dangerously overbought to desperately oversold, tells us we’ll most likely see a bounce back this week.
But I wouldn’t bite on it if I were you. Stocks will likely retest the lows again, and could still quite possibly sink lower.
A reasonable downside target is 2,570, slightly below for the S&P, and just below 23,500 in the Dow. This merely resets the clock back to where stocks were before Thanksgiving.
But I expect those levels could be reached before a lasting rebound rally kicks in.
The second possible scenario is a seesaw trading range, where stocks move sideways, for a while, but with more volatile up-and-down moves than we’re used to seeing.
In this scenario, most of the downside damage to stocks has already been done. The market will essentially move sideways, a correction in time rather than price.
This would be the more frustrating of the two possibilities, because investors eager to buy the dip won’t be quickly rewarded.
I’ll be keeping an ever-watchful eye on these key levels for the Dow and S&P. Soon enough we’ll know which scenario will play out for stocks.
In my next article, I’ll give you a few buying ideas for when that time comes.
Here’s to growing your wealth,
Chief Income Expert, Mike Burnick’s Wealth Watch
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