We have been long overdue for a correction.
After a 10,735-point run on the Dow Jones Industrials in just over a year, the index plunged more than 1,500 points in two days, wiping out $1 trillion of value.
Why did the market fall so fast – 800 points in 10 minutes? The culprit is computerized trading that uses complex algorithms to trigger selling.
According to BBC News:
Algorithmic trading has become so ubiquitous that some estimate well over half of all trading of the S&P 500 Index is done this way. Such automated trading almost certainly accelerated the sell-off on Monday, which saw the Dow Jones Industrial Average crashing 800 points in ten minutes.
"The explosive speed of the fall ... that is done by machines," said Tom Stevenson, Investment Director at Fidelity Personal Investing.
Granted, there are fears that the Federal Reserve, now under Chairman Jerome Powell, could accelerate interest rate hikes and potentially slow our red-hot economy. The only reason we didn't see this threat under former Fed boss, Janet Yellen was because inflation didn’t post a significant threat.
In fact, inflation stayed under the 2% annual target rate for quite some time.
However, with a tighter job market, higher wage growth and the idea that tax cuts could accelerate growth, there are concerns of higher inflation, which could lead to higher interest rates. If, for example, inflation soared above 2% -- which is a concern – the Fed would be forced to quickly accelerate hikes to tighten credit and stop inflation threats.
That concern is fueling a good deal of the fear in the markets now. However, we are not worried because the economy’s fundamentals remain strong.
While some analysts argue that stocks are “fully value” or that we “could easily see a 10 to 20% correction sometime this year,” as noted by The Washington Post, others “see the decline as an opportunity given that corporate earnings are rising…”
"I'm not worried about this move. This is all a Fed move," said Joe LaVorgna, chief economist for the Americas as Natixis, as quoted by CNBC. "If you don't think there's inflation and you don't think the Fed's going to be as aggressive as the hawks would have you think, this equity selloff should be bought."
In our opinion, this two-day drop created a buying opportunity for smart investors because the markets are resilient and underlying economic strengths are still in place.
In fact, that two-day drop didn’t last long because the DOW closed up 567 points on Tuesday. However, on Wednesday we saw continued volatility.
We expect to see more volatility in the markets in 2018, but overall, the year should prove to be very profitable for investors.
Stay tuned for more from The Cheap Investor.