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Stocks struggled Wednesday as fearful investors retreated to bonds and cash. Here’s a look at why the sell off happened and why it may actually be a good thing.
Stocks suffered big drops across the globe on Wednesday as fearful investors retreated to bonds and cash.
The S&P 500 (INDEXSP:.INX) ended the day at 1,862.49 points, down 15.21 points, or 0.81 percent, after dropping to 1,822.8 points midway through the day. Meanwhile, the Dow Jones Industrial Average (INDEXDJX:.DJI) closed at 16,141.74 points, down 173.45 points, or 1.06 percent. Like the S&P 500, it hit an even lower level during the day, sinking to 15,860.23 points.
In Canada, the S&P/TSX Composite (INDEXTSI:OSPTX) closed Wednesday down at 13,869.88 points, having suffered a 1.19-percent decline, while The Globe and Mail notes that London’s FTSE 100 (INDEXFTSE:UKX), Germany’s DAX (INDEXDB:DAX) and the Paris CAC 40 (INDEXEURO:PX1) all declined by over 2.5 percent.
One bright spot, Bloomberg notes, is that gold managed to climb near a five-week high of $1,244.36 an ounce. Silver also gained, inching up 0.3 percent to hit $17.5245 an ounce.
Why are investors worried?
As mentioned, it’s fear that’s driving investors away from stocks. But what are they so worried about?
Unfortunately, there’s no one answer. As Andre Bakhos, managing director at Janlyn Capital, commented to Reuters, “[t]here wasn’t a single trigger. We’ve been in a downtrend recently and it’s been a continuation of the recent trend change to the negative.”
That said, a few contributing factors include:
- United States: According to Bloomberg Businessweek, negative US data is a big part of the reason stocks are down. For instance, retail sales dropped 0.3 percent in September following a gain of 0.6 percent in August. Commerzbank’s Peter Dixon, a global equities economist, told the news outlet, “[g]lobal investors are very sensitive to data misses that add to signs of slowing global growth. When the U.S. is flashing red, the kneejerk reaction is to sell off.”
- Europe: Speaking to Global News, Ian Nakamoto, director of research at 3MACS, said that “[f]ears over Europe slowing” contributed to Wednesday’s drop. Part of the problem, he added, is that Germany, Europe’s biggest economy, recently “slashed its growth forecast for this year and next, deepening worries that Germany could slip into recession.”
- China: China isn’t exempt to concerns about slowing growth. As with the US and Europe, investors are worried about a slowdown in the nation.
- Canada: The poor oil price is hurting Canadian stocks, but as the Bank of Nova Scotia’s Camilla Sutton told The Globe and Mail, it’s “a two-sided story.” That’s because “[w]hile it plays itself out in the oil market, it’s also driving down pump prices, which is good news for American consumers, and thus the broader economy.”
- Ebola: The Ebola outbreak, which has now reached Spain and the US in addition to various countries in West Africa, is also of course casting a pallor over the world’s markets.
When viewed together, it’s not hard to see how that combination of factors has stoked investor concern.
Profitable opportunities
Investors who haven’t caught the fear bug are likely wondering how to take advantage of the current situation. Fortunately there’s been plenty of discussion among analysts about how to do so.
The main point optimists seem to be making is that often when stocks take a hit it’s a buying opportunity. For instance, Rick Rule, founder of Sprott Global Resource Investments and a well-known speaker, said this week that in just a few years investors will likely be looking back on 2014 as a time of opportunity: “[i]n 2017 or 2018, I believe we will think of 2014 as the days when you could buy companies with the most compelling projects and management teams at 75 percent discounts from their previous highs.”
He added, “[w]e have all had the experience of seeing goods on sale and procrastinating, and later on seeing them priced much higher. You think to yourself ‘I really wish I’d participated.’ Those are the kinds of times that get referred to as ‘the good old days.'”
Certainly a perspective for investors to consider following today’s market action.
Securities Disclosure: I, Charlotte McLeod, hold no direct investment interest in any company mentioned in this article.