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Category: Stock Market
Date: 12 June 2020 We take a look at the latest significant sell off in the main market indices including the Dow Jones, S&P 500 and the Nasdaq. The Dow Jones closed the 11th of June 2020 down by -6.9%
Warren Buffett the world's best known investor said, be greedy when others are fearful, be fearful when others are greedy. Basically sell offs providing buying opportunities for savvy investors. Note buying opportunities. Not selling opportunities." |
Strong declines in all the main market indices
On the 28th of May 2020 we warned that something doesn't add up with regards to the performance of the main market indices. The stock market recovered rapidly following the strong sell offs in early March 2020. That sell off was triggered by the Covid-19 pandemic. While the sell off was warranted we couldn't understand why the markets recovered so quickly. Its not like the virus just went away. While we understand that financial markets are forward looking we think markets were a little optimistic in terms of the economic recovery it was expecting. The full economic impact of the Covid-19 pandemic is yet to be felt by companies and economies across the world.
In a 10 week period the United States lost around 40 million jobs. Now why would markets basically be at break even when the biggest economy in the world lost 40 million jobs? The new people joining the unemployment queues have bills to pay, debt to service, families to feed etc. So defaults on debt will balloon, consumers will spend less and save more (a natural reaction when economic hardship hits). So demand for goods and services supplied by companies will decline, which means less profits, and in turn less taxes for the US government.
In response to this the US Federal Reserve Bank (The FED) has been buying up government issued debt at breakneck speed. Essentially it is printing money and flooding the markets with this cash. Economics 101 states that if the amount of money in circulation increases so will inflation. While money has increased, inflation has not realised. Well not where the FED expected it at least.
All the excess cash (coronavirus cheques paid by the US government to millions of citizens) has been making its way to the financial markets (as we mentioned earlier people are looking to save more). So increased demand on financial markets have lead to prices increasing. Economics 102 states that as demand for a product increases and supply remains the same the price will increase. So lets assume the number of companies and their shares listed has remained unchanged over the last 6 months, and now all of a sudden there is a sharp increase in the demand for investing in stocks as people look to save more. This has pushed up stock prices beyond where we believe it should be at this point of time in the Covid-19 pandemic.
The graphic below shows the performance of the Dow Jones Industrial Average (DJIA) index over the last month. As soon as a user clicks on the Nasdaq or S&P500 the graphic recalculates and shows the returns of the additional indices selected. The graphic will recalculate the returns if users provide their own dates (or they can select predefined dates from our Zoom box in the graphic).
In a 10 week period the United States lost around 40 million jobs. Now why would markets basically be at break even when the biggest economy in the world lost 40 million jobs? The new people joining the unemployment queues have bills to pay, debt to service, families to feed etc. So defaults on debt will balloon, consumers will spend less and save more (a natural reaction when economic hardship hits). So demand for goods and services supplied by companies will decline, which means less profits, and in turn less taxes for the US government.
In response to this the US Federal Reserve Bank (The FED) has been buying up government issued debt at breakneck speed. Essentially it is printing money and flooding the markets with this cash. Economics 101 states that if the amount of money in circulation increases so will inflation. While money has increased, inflation has not realised. Well not where the FED expected it at least.
All the excess cash (coronavirus cheques paid by the US government to millions of citizens) has been making its way to the financial markets (as we mentioned earlier people are looking to save more). So increased demand on financial markets have lead to prices increasing. Economics 102 states that as demand for a product increases and supply remains the same the price will increase. So lets assume the number of companies and their shares listed has remained unchanged over the last 6 months, and now all of a sudden there is a sharp increase in the demand for investing in stocks as people look to save more. This has pushed up stock prices beyond where we believe it should be at this point of time in the Covid-19 pandemic.
The graphic below shows the performance of the Dow Jones Industrial Average (DJIA) index over the last month. As soon as a user clicks on the Nasdaq or S&P500 the graphic recalculates and shows the returns of the additional indices selected. The graphic will recalculate the returns if users provide their own dates (or they can select predefined dates from our Zoom box in the graphic).
So what to do during a market sell off
So below a few tips on what to do during a market sell off. Warren Buffett the world's best known investor said, be greedy when others are fearful, be fearful when others are greedy. Basically sell offs providing buying opportunities for savvy investors. Note buying opportunities. Not selling opportunities. So what to do during a market sell off.
- Do not panic
- Do not sell during a sell off. Repeat. Do not sell. You sell when markets go up, not when they going down
- Keep an eye on the prices of stocks/ETF's you looking to buy or add to your portfolio
- Make sure you always have cash available in your trading account to buy during dips or sell offs
- If you think its cheap today, remember it can be cheaper tomorrow. So do not buy on the first day of significant market moves. Sit on your hands and watch things unfold.
- Once a stock/ETF/Fund hits a price you are happy with commit and buy and leave it alone. Do not fixate about the hourly/daily moves of stocks or the market. It will drive you and those around you insane.
- Once you done with the shopping spree of stocks/ ETF/ Funds during a sell off, you wait.
- When markets start going up again, look to sell your stocks/ETF/Funds you bought during the sell off and book the profits.
To put things in perspective , yesterday (11 June 2020) sharp sell off in markets is not the end of the world: Below the returns of the main market indices over the last 12 months (sorted from best performer to worst performer)
So even with the sharp sell off yesterday (11 June 2020) and the two days of decline before that two of the three major market indices are still in the green over the last 12 months. The only major US market index in the red over the last 12 months is the DJIA with it being down by around -3.7%
- Nasdaq: 21.75%
- S&P 500: 3.99%
- Dow Jones: -3.69%
So even with the sharp sell off yesterday (11 June 2020) and the two days of decline before that two of the three major market indices are still in the green over the last 12 months. The only major US market index in the red over the last 12 months is the DJIA with it being down by around -3.7%