In early November 2018, all was well, and investors were chasing markets higher. The NASDAQ was atop 7,572. The S&P 500 had exploded to 2,815. The Russell 2000 was up to 1,582.
On November 7, the Dow Jones Industrial Average (DJIA) hit a high of 26,200. Then, it fell apart. The Dow Jones would lose 17% over the next seven weeks, hitting a low of 21,712 on December 26. Investors panicked, fearing a repeat of the 2008 market disaster, and even a recession. Doom and gloom blared across headlines, and news programs. Most feared the worst.
Election fears only added to the malaise at the time.
With the November 2018 election, the Democrats took control of the House by winning 40 seats, and they proudly proclaimed that they will oppose President’s Trumps economic policies, and just about anything else he has supported.
That alone induced sizable panic in the markets.
After all, since the 2016 presidential election, markets soared primarily on the Trump Administration’s economic policies that cut taxes and relaxed overly-restrictive regulations.
The very idea that the Democrats could stop that momentum caused a good deal of chaos.
Unsurprisingly, in response to this change in power, institutions started mass selling, causing a snowball effect that took many stocks down 20 to 40%. Businesses were nervous about policy changes that Democrats may make in the coming months, and investors were panicked about falling stock prices.
But that fear turned out to be short-lived.
In January, the DJIA would rebound more than 3,000 points from its December 26 low.
The No. 1 Rule in Panic Pullbacks
Who were the smart investors during that correction?
Certainly not the ones who followed the “experts” and sold shares of fundamentally sound stocks. They would have been much wiser to have held on to their quality stocks.
The key during corrections is to avoid panicking and dumping shares, just because everyone else is doing so. Instead, take a deep breath, and review your portfolio. Is there terrible news that caused the stock to plummet? Is the income statement and balance sheet still solid? If there’s no negative news and the fundamentals are sound, take advantage of the opportunity to buy more shares at a low price.
Taking the time to reassess your portfolio, rather than panicking and dumping everything, can be the difference between making or losing a fortune.
It’s part of the reason The Cheap Investor has consistently done well over nearly four decades.
We’ll share more of our insight in coming issues, along with many more opportunities.