Dow down 7% – Time to buy?

The fall of Dow - more correction or time to buy?

The fall of Dow - more correction or time to buy?
The fall of Dow - more correction or time to buy?

The Dow Jones has lost close to 1700 points in the last two trading days – what is going on? Should the average investor be worried?

Research indicates that a majority of the largest percentage gains came within two weeks of the biggest single-day losses! As Warren Buffett says, get greedy when the market is fearful!

First off, the Dow Jones Industrial Average (DJIA) is just an index based on 30 stocks – it does not reflect the state of the market as a whole. This could be a pullback from the dizzy heights that the market reached in anticipation of the Tax cuts, which President Trump has already delivered (well, most of it).

We must keep in mind that the Dow has increased more than tenfold in the last three-plus decades. Thus, that 508-point lashing that the Dow got in October 1987 would be equivalent to the Dow losing 5,921 points in a single day in 2018 terms. The Dow wasn’t even remotely close to that level today.

Historically the Dow has had pullbacks wherein the stock market corrected by at least 10%. Taking the drops of Friday and today together, it has fallen about 6.7% from its high of around 26000. So it has a way to go before it will resume its upward trajectory again.

What ails the market?

Could it be due to the 10-year Treasury bills which reached a new high of 2.84 percent? The 3 percent yield is looked at as a key threshold that can drive investors out of equities and into bonds[1].

“The pullback has everything to do with the 10 year Treasury moving higher, breaching that 2.8 percent level,” said Wayne Wicker, chief investment officer at ICMA Retirement Corporation. “Investors are concerned that it moves the trajectory of Fed rate hikes maybe to four rather than three this year.”

Those concerns were fueled by Friday reports on increasing wages and tightening labor markets, a reflection of a muscular economy that could veer out of control. The Commerce Department reported Friday that factory orders rose 6 percent last year, the measure’s best percentage increase since 2011.

What should the investor do?

Regardless of which country you live in, this correction is going to affect you (meaning the stock market in your country is also going to dive). Here are three suggestions on how to come out ahead from this plunge –

  1. Corrections of about 10% are normal and it must be kept in mind that there hasn’t been one since January 2016[2].
  2. Stay the course. If you have been making money on the upside ride, you have picked a set of stocks that have done well for you. Now maybe a good time to add to your position, if you have free cash.
  3. Research indicates that a majority of the largest percentage gains came within two weeks of the biggest single-day losses! As Warren Buffett says, get greedy when the market is fearful!

Happy investing!

References:

[1] Dow drops 666 points and posts its worst week…Feb 2, 2018, Denver Post

[2] Putting the DJIA plunge in perspectiveFeb 2, 2018, Fool.com

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Sree Iyer

An inventor and out-of-the-box thinker, Sree Iyer has 37 patents in the areas of Hardware, Software, Encryption and Systems.

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1 COMMENT

  1. Does it look like a bearish phase similar to 2007-08? Moreover, the country debt, bad loads, fed fiat money all seems to be alarmingly high.

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