August 5, 2019, is a day that investors would love to forget but few will. The Dow Jones Industrials plunged 767 points, the worst drop in 2019, and the sixth worst one-day point decline in Wall Street history. Losses on the New York Stock Exchange outnumbered winners by a margin of six to one. Bad as the close was, it marked a recovery of 200 points from the low of the day. With this carnage occurring in the week preceding Tishah B’Av, the timing was perfect.
The rout was across the board with only a few exceptions. Big tech, which had fueled much of the market’s gains in recent years, took it on the chin. The plunge in high tech had actually started the Friday before, when the Big Five – Microsoft, Apple, Amazon, Alphabet, and Facebook – lost a combined total of $66 billion.
But the worst of the damage took place on Monday August 5, when each lost more than 3% of their value, and a total of $162 billion in shareholder value was vaporized.
The drop was unnerving to the point that even stolid investors were rattled. Was this the start of the Big One investors have long feared? Would the selloff unleash unforeseen financial chaos on Wall Street and the rest of the world?
Fortunately, we were spared those dilemmas, but that doesn’t mean we should breathe a sigh of relief and continue as if nothing happened. A more constructive approach would be to learn lessons that could help us get through market plunges in the future, should those occur.
One of those lessons is trying to stay calm during a raging storm, and while that’s a lot easier said than done it’s nevertheless worth making the effort to try. In retrospect, we now realize that the market drop, frightening though it was, was not as bad as it seemed to be.
At the close, the Dow was down just 6% from the record high it made on July 26; was that really so terrible? Experts agree that the market has to drop 10% to be called a correction, and while those are unpleasant they are not exactly complete strangers to Wall Street. Since 1950 there have been 37 separate corrections in the S&P 500 according to Yardeni Research, which translates to a correction about once every 1.9 years.
Of course, Wall Street doesn’t dance to the beat of a calculator. Sometimes there is no correction for several years, while at other times there are two or more corrections within the same year. Whenever corrections occur it’s important to remember that they are not totally bad, as they remove excesses from the market and sometimes set the stage for future rallies.
Don’t Forget The Change
While investors have been focusing most of their attention on the Dow, the volatility in commodities, interest rates, and cryptocurrencies is an even bigger story. Consider the following examples.
*On November 8, 2018, the yield on the 10-year Treasury was 3.23%; but on August 7 it was down to 1.63%, an incredible decline of 50%.
*On October 9, a barrel of crude on the Merc traded at $73.23; on August 5 it was $51.23.
*On October 9, an ounce of gold was trading at $1226; on August 7 the price smashed through the $1500/ounce level and reached $1515, a gain of more than $32/ounce in a single session.
*On December 14, Bitcoin was just $3235, a mere shadow of its all-time high. But on August 7 it was nearly $12,000, an impressive rebound.
Savvy investors don’t just watch these trends, but also try to figure out what’s driving them and how these may impact the market going forward.
Take A Chance?
The selloff, which was triggered by growing trade tensions, raised an important question: Should investors look for opportunities in countries other than China?
Ray Dalio, a billionaire investor and co-founder of $160 billion Bridgewater Associates, doesn’t think so. In fact, he’s very bullish about China and is urging investors to take advantage of the opportunities developing there, despite the intensifying tensions between our two countries.
Dalio characterized the trade conflict as “a natural evolutionary step in the course of economic history as a rising power challenges an existing world power... Bet on China or risk missing out on their piece of the next global empire,” he says.
And he’s not concerned about the ongoing risks and tensions. “If you wait for everything to be crystal clear, everything is going to be terrific, but you’ll pay a higher price,” said Dalio. “Investors could be early or they could be late. I would say that now is the time to invest in China.”
Peter Schiff, the founder and chairman of Euro Pacific Asset Management, also had thoughts about what the market’s big selloff means to investors. “You can’t say the dollar is strong when it’s lost $30 against gold in one trading day,” he explained. “Gold tells you we have a weak dollar.”
Schiff believes that interest rates will fall to zero percent, and that going forward the Fed will start another quantitative easing program. But this time, he says, the Fed won’t be able to prevent another recession, and its inflationary policies will ruin the US dollar. He compares today’s market environment to the one prior to the Great Recession.
Schiff said that the price of gold will soon move above $2,000, and that small double digit moves in gold are indicative that the metal hasn’t even started to catch on to the fact that we are mired in recession.
“We will see hundred dollar moves in gold as the true economic landscape becomes clearer,” he said. “The smart money is buying into gold and silver because those are legitimate stores of value, they are monetary assets, and they are going to shine when the dollar crashes.” Schiff added the dollar will continue to weaken for the foreseeable future.
It’s been said that experience is the best teacher, so having gone through the big selloff on August 5, investors should now be more knowledgeable about the market and about themselves and better prepared for the next plunge.
This is true, but unfortunately only in theory. In real life, if the market swoons again we’ll probably panic when we see our stocks melting down, and wring our hands about what that means for the outlook of the economy. We’ll phone our brokers and sell at any price just to salvage what’s left of our assets and escape from the unfolding hysteria around us.
And this shouldn’t surprise anyone because that’s human nature. Learning lessons about the market is very difficult, but changing human nature – that’s the really hard part of investing. Hey, no one said this would be easy.