It was a rough couple of days for investors last week when major indices plunged.
The tech-heavy NASDAQ fell from 8,100 to 7,300. The S&P 500 dropped from 2,925 to 2,725.
And, after hitting an all-time high of 26,951, the Dow Jones Industrials plummeted almost 1,400 points.
It’s tough to sugarcoat such a pullback, but we have to remember a few things.
- Markets don’t run up in straight lines.
- We were long overdue for a healthy pullback.
- It’s perfectly normal to see pullbacks in bull markets.
In the dot-com boom we saw five declines of more than 10% during that run.
Investors got a bit over-excited and nervous about bond yields.
The benchmark 10-year Treasury yield spiked to a 3.25% -- its highest level since 2011.
When rates get this high, it raises the likelihood of tighter monetary policy, which can eventually trickle down to cap company profits and dividends. Higher rates hurt stocks by making bonds more attractive than stocks.
In addition, it can also make it expensive for companies to borrow and invest.
That’s what spooked the market.
"We don't know who is to blame here; it's a little like trying to find what or who is responsible for the dangerous hurricane in Florida," says Chris Rupkey, chief financial economist at MUFG, as quoted by USA Today. "But make no mistake about it, the stock market decline, triggered perhaps by rising bond yields, is just as dangerous."
So, what should an investor do about the stock market drop?
The best thing to do is sit tight and remember that markets are resilient.
The last time the markets fell like this was January 2018, when the DOW plummeted nearly 3,300 points (from 26,600 to 23,300). Soon after, it recovered and hit new highs.
While market pullbacks are disturbing, they can provide opportunities to buy quality stocks at bargain prices.
Yes, the market tanked last week, but the economy is still strong. Unemployment is at a historic low. Consumers and businesses are confident. The GDP is above 4.2%. Even company earnings are expected to show continued progress.
As noted by MarketWatch, “Third-quarter earnings will be a major driving force as companies report over the coming weeks. According to FactSet, analysts are looking for earnings growth of about 19% and sales growth of 7%.”
In short, don’t allow market pullbacks to scare you away from the markets. Don’t panic and sell. Just remember how resilient markets have historically been.
Your best option -- stay tuned to The Cheap Investor for investment ideas.
We’re finding plenty of interesting investment opportunities in this healthy pullback.