Bottom Line: The Most Recent Market Decline Is Being Led By Tech Stocks, Based Largely On Overblown Short-Term Fears And Stocks Are Likely Close To Bottoming
It’s never fun to watch your portfolio plunge fast and hard. However, it’s important to know the difference between short-term correction based on overblown fears, and a sign of an impending recession and bear market.
This retracement to previous pullback lows, which threatens to put the market into a full-blown correction, is primarily being driven by the former high-flying tech stocks that were for so long the darlings of Wall Street. That meant that these naturally volatile stocks became a large part of every major index, and are thus causing the market to fall at a rapid pace.
However, while the risks the market is obsessing over are very real, the fact remains that the tech bear market that is driving stocks lower is likely an overreaction. With the exception of NVIDIA, all the FAANG stocks reported good top and bottom line growth last quarter. And while guidance may have disappointed Wall Street, revenues and earnings for tech stocks, and corporate America, in general, are likely to still come in strong next year, historically speaking.
Meanwhile the bond market, the best recession predictor yet discovered is indicating that slowing US growth next year will NOT continue to a full-blown recession. And since WWII 82% of bear markets have occurred during recessions. That means that at worst, this latest market downturn is likely to prove a run of the mill correction, which is a natural and healthy prerequisite to stocks hitting new highs in 2019.
The best thing investors can do right now to protect their portfolios is nothing at all. If large daily losses might cause you to panic sell near what’s likely to be the bottom, then turn off the TV or stop checking your portfolio. Despite what the last few weeks might lead you to believe, the bull market isn’t likely on its deathbed, and strong economic and corporate fundamentals, combined with lower stock valuations, means the bull market likely has years more to run.
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