Thoughts on the Huge Market Drop

Nothing lasts forever, especially a bull market. Today the Dow Jones fell over 1,100 points, its biggest single day drop in history, putting an end to the 8 year bull market run that started in 2009. Whew! What a ride it’s been.

I’m primarily a micro-view Guy so I won’t claim to understand everything driving this slump but the easiest trigger was the report last Friday that wages had surged by the highest level ever recorded since 2009, a strong sign of economic strength and something that suggests inflation shouldn’t be far off. Thus, costs of capital is going to go up, and combined with the Fed’s expected rate hike means that low risk treasury bonds are going to have a greater return/yield profile.

So people sold off stocks massively to pile into treasuries leading the yield on the 10 year treasuries to fall from almost 3% (a level it hasn’t hit in years until just last Friday) down to 2.79%. That sell off led many more people to panic sell out of equities. So almost every broad market index is down. Ah well.

For a lot of reasons this isn’t entirely a bad thing. The pile in to bonds is going to lower yields again giving the Fed room to push rates a bit further up or if it doesn’t want to spook the markets further, then just leave them where they are and hope things calm down the rest of the year. But if inflation makes a reappearance it is because growth is back in the building and that means economic activity is going to continue at a sustainable clip. So I won’t be surprised if Stocks still finish this year up over 10%.

Meanwhile, the VIX which essentially measures the expectations of volatility in the market by averaging the premiums on S&P options contracts has shot up over 100% from 15 to 35. That means investors expect much more up and down movement in the market over the year. Which means trading revenues for a lot of financial companies is going to come up. Over the last few years the VIX has been low and stable implying an almost riskless market so having it switch up isn’t really a bad thing even if it might hurt some people in the short term.

Listening or reading financial news you’d think all this meant the world was ending again. I suggest if you’re investing just don’t watch CNBC for your own good. It’s designed to have you in a hyperactive state. It’s good for ratings but it’s not reality.

Personally, I have been largely out of stocks for a while (since last year) trying to move into real estate. But if I were still in it (as my long term portfolio is), I wouldn’t lose sleep over this. It’s a big fat nothingburger.

Find good businesses, at great valuations, buy them and ignore the market. That’s my motto and it should be yours too.

Adios.

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