It was rough in the stock market over the last week. On Monday, February 6th, the Dow Jones Average fell 1,100 points. That’s a lot of points, but it’s not the whole story. While the media draws you in with a bold scary headline they did not explain or support why the market dropped so suddenly.
Allow me to share with you a story from a long time ago…
In the late 1980’s after graduating college, I moved into an apartment that was rather basic and sparsely furnished, as one does at the age of 23. I wanted to try spruce up the place but I had a really tight budget. I knew the best place to buy chachkies, like houseplants and low cost framed artwork, was at the San Diego flea market. Every Saturday a giant flea market was held in the parking lot at the San Diego Sports Arena, which was home to the underwhelming San Diego Clippers NBA team. The flea market filled up with vendors, across the whole parking lot on the weekends. One day I went in search of bargain items to furnish my apartment, I wanted several large houseplants priced at $20 each. Back then twenty bucks were like $100 today. I was cheap, but I really wanted those houseplants. They were 5’ tall, super healthy, and I felt they would add some life to my dreary apartment. You know the drill at a swap meet? You wait to the end of the day and offer a lowball price. Dutifully, I waited until about 5 pm and approached the Korean lady selling the houseplants. She wouldn’t budge. And for some reason, I didn’t either and so I walked without buying.
Hang in there, I’m telling you this story for a reason.
A few weeks later, I went to the Saturday flea market again. Except for this time, it was a rare day. The weather was threatening, grey clouds and high humidity. Late that afternoon, it began to rain. Now, if you want to keep people in southern California in their houses all day—just tell them it is going to rain, it doesn’t even have to rain, just tell them it will. This day, the parking lot had a fraction of the cars. You could see far fewer vendors remained as the raindrops began hitting their tents. I approached the houseplant lady. I remember the pained look on her face as the wind swept up and she grabbed her long straw hat to keep it from blowing off her head. She asked, “How many you want?” I offered that I would give her $40 for three plants. At first, she said, “No. Twenty each.” I slowly turned to walk away. Her voice raised sharply, and she called out, “Okay, forty dollars for three.”
Fast forward to February 2018. As you know, last week the stock market tumbled downward fast. The Dow Jones Average dropped over 1,100 points on Monday. A few clients reached out to my office. What is going on? People want answers naturally. I attempted to look for a technical reason and listened in on several conference calls with economists from large investment firms we work with. There was no agreement on what caused the drop.
Sometimes, things are not complicated folks. Sometimes, the stock market drops unexpectedly. Just like the poor weather that day back in 1988 at the San Diego flea market. Sometimes there are too few buyers amongst the many sellers. The houseplant lady got a lousy price because nobody showed up to buy that day—and she wanted cash.
The stock market is, of course, more complex. It is also a very efficient voting machine—over the long run. In the short run, the stock market can get prices wrong. Stock market corrections occur about once a year on average. But these market corrections are usually temporary. The buyers eventually return. If I had gone back to the flea market the following weekend when it was a normal sunny southern California day; the houseplant price would’ve been back to its regular “twenty dollars each.” I try to keep this in perspective when the stock market drops unexpectedly. It’s usually just bad weather and it will pass.
As of last Thursday, the S&P500 fell into official “market correction” territory; dropping 10% from its January high. Here are a few facts about market corrections:
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