A trifecta of bad news on global growth + still-high oil prices + nail-biting over Greece caused investors to take a time out and sell stocks, sending the Dow down 203 points. Can you blame them? After all, the major U.S. stock indexes have been on a 25 percent bull run since the October lows, so a pause is not only to be expected, it's welcome.
Here's what happened: First, Chinese leaders announced they would be targeting "only" 7.5 percent growth in 2012, then data out of the Eurozone indicated that the economy contracted by 0.3 percent in the fourth quarter and is likely to remain in a recession this year. On top of those two expected economic slow-downs, a most unexpected development caught investors off-guard -- Brazil announced that its economy grew by only 2.7 percent last year, far below the sterling 7.5 percent growth rate seen in 2010. The Brazilian Institute of Geography and Statistics ("IBGE") said the drop-off was due to a fall in exports and a decline in business confidence resulting from the ongoing European debt crisis.
On top of global growth worries, there's always Greece to make an investor contemplate the worst-case scenario. Leave it to the Greeks to go down to the wire-the country has until Thursday evening to convince private lenders to agree on a bond swap where investors would write off more than half of the $234 billion owed to them by the impoverished nation. The bond swap is a condition for Greece's second $172 billion bailout loan. Without the bailout, Greece will not have the funds necessary to pay $19 billion bond redemption on March 20th and would default on that obligation.
U.S. markets saw their biggest one-day drop in nearly three months and the Dow had its first triple-digit loss of 2012. The blue chip index had gone 45 consecutive sessions without a loss of 100 points, the longest stretch since 2006.
- DJIA: 12,759, down 203, or 1.6% (52-week low: 10,404 on 10/04/11)
- S&P 500: 1343, down 21, or 1.5% (52-week low: 1074 on 10/4/11)
- NASDAQ 2910, down 40, or 1.4% (52-week low: 2,298 on 10/4/11)
- April Crude Oil: $104.70, down $2.02, or 1.8%
- April Gold: $1,672.10, down $31.80, or 1.9%
Clearly one day shouldn't sway you from your long-term game plan, but I am concerned that so many people are asking whether or not this is the beginning of a longer term pull-back. Haven't we learned anything from the past five years? Even if you knew that stocks were going to plunge another 10 percent, how would you know when to get back in?
Over the last five years, investors have been consistently spooked by markets and yanked money from their stock mutual funds. As a result, many have not participated in the market's recovery. As my colleague Larry Swedroe notes, investors are their own worst enemies, as they sell on fear and buy on greed. "Investors missed the greatest bull market of the past 70 years due to panic selling from the 2008 bear market. Now, it looks like the same panicked selling caused investors to miss out on big gains once again."
Here are three steps to help you break your fear-greed cycle:
- Don't make any rash decisions amid a big downturn
- Maintain diversified balanced portfolio
- Stick to your game plan!