Stock Market Correction

Record Breaking Movement

I’m sure most of you saw the news in the last 48 hours and are wondering if the world is going to implode or not. I suggest the world will not in fact implode, but if things do not change, life will be very different. The words that I’m about to offer you won’t do the market action justice, but I’ll do my best to share our take on the latest market commotion. 

On Sunday night, my tablet was armed and ready for the open. I thought we would see movement, but I didn’t imagine the S&P 500 would shed 50 points before midnight and be in a stock market correction within 48 hours. This pre market activity didn’t seem real as the Dow dropped over 1,000 points before most people had their first cup of coffee Monday morning! When the closing bell sounded, investors reflected on the day; we witnessed history as the Dow moved over 4,000 points in a trading session and broke an intraday record for movement! The S&P 500 last saw an intra-day drop this big in 2011.

Correction Territory

The recent market pressure leaves the equity markets in official “correction” territory. Investopedia defines a correction as a reverse movement, usually negative, of at least 10% in a stock, bond, commodity, or index. The definition of correction on its own does not scare me, what scares me is that China just lowered rates, injected cash into their markets and the U.S. market just closed down 25 on the day… after showing  S&P 500 gains of over 40 pts-all in one day!

What’s Next?

Risk management is next. We all want to be the hero and predict the market’s next move. In reality, nobody has a crystal ball. As always, I highly encourage you to use proven risk management techniques under these unfavorable market conditions. Make sure you know your risk tolerance. How will you react when your account value shows $400,000 instead of $1,000,000? Was a drawdown of $600,000 part of your expectation?

Ask your advisor how he/she manages risk. Ask them how much you will lose if the market drops another 10% or 20%.  Ask them what their strategy is if the market spirals into another 2008. Do they have cash on hand to buy lower? Will they have the guts to buy if markets are imploding?

Plan for the worst and hope for the best.