The S&P 500 Index Sinks to a Fresh Two-Month Low: What Should You Do?

The turbulent sell-off in US markets continued on Thursday (US time) as the S&P 500 index closed 3.8% lower. The Dow Jones Industrial Average index fell 4.2% and it is on track to post its biggest weekly decline since October 2008. Asia’s stock indices tend to track US equities and it is likely that Asian equities will close this week sharply lower.

When stock markets plunge, there is an endless chatter of opinions on why it happened and of course, those who tell you they “saw it coming”. As my grandmother used to say, “A broken clock is right twice a day”. Any investor worth his salt knows that markets are inherently volatile. Saying the markets are overvalued or are in a bubble simply because of record highs set in 2017 is really nothing insightful.

So, allow me to share some observations on the market fundamentals impacting the US market (which sets the stage for global equities).

One, the 2017 fourth quarter earnings season for S&P 500 companies has been the best ever reported in the past five years. Over 80% of S&P companies that have declared earnings as of end-January 2018 reported both better than expected earnings and sales growth.

Two, most financial analysts have not identified any key changes in macro-economic fundamentals or clear negative triggers for the market correction. In fact, the IMF (International Monetary Fund) notes that world economic outlook continues to brighten into 2018 and there is an increasing pick-up in economic activity. Most analysts expect the market sell-off and volatility to continue due to an ever-increasing trading volume from algorithmic based automatic trading that buy and sell when prices hit certain thresholds.

Three, the US 10-year Treasury Bill has been a key focus throughout the equities sell-off. The 10-year yield has gone up from around 2.5% a month ago to over 2.8% as of Thursday’s market close. This is an increase of 15% and close to a four-year record high. Interest rates are going up. By comparison, the S&P 500 started the year at 2,700 and closed at 2,581, or a 4.5% drop to a three-month low.

The Foolish takeaway

Where to from here? When we put the above pieces of information into perspective, it becomes clear that the volatility in equities should continue as investors evaluate how much equities should be worth as interest rates rise. Interest rates are expected to go higher because economic activity is improving.

Therefore, this might be the time to put Warren Buffett’s quote into action: “It is wise to be fearful when others are greedy, and be greedy when others are fearful”.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice.

Editor's note: The article has been amended after publishing.