Last week, I wrote a post saying that we were headed towards a correction. In that post, Josh Brown of Ritholtz Wealth claimed that the 200 day moving average of the S&P 500 would act as an area of support for the index at 1905. I argued that the actual area of support was 1925, and if the S&P fell below that price point and stayed below it, we could be headed towards a correction faster than people would have anticipated. Now I don't want to say I told you so, but after falling below 1925, the S&P fell towards the 200 day moving average of 1905, and bursted through this "support" level the very next day. In three days, the markets plunged three percent with no clear sign of a rebound. In three days, panic has crept in, while some analysts are still in denial, claiming that the S&P 500 wil have a strong finish. At almost 7% below the all time high of 2010, I think the markets can continue to fall, which is wonderful if you aren't a speculator.
First, moving averages serve as psychological trading signals for speculators and traders. When assets fall below moving averages, these assets are either avoided or sold to avoid further losses. After falling below 1905, panic and fear selling by speculators could drive prices lower, even though the businesses we are interested in investing in have had no real economic decline. Apple(AAPL), McDonald's(MCD), or AT&T(T) haven't suffered any business losses that would justify a decline in their price. However, the inflated values and prices of these companies has declined because there wasn't a real economic basis for these prices. The businesses haven't become bad businesses to invest in over the past three trading days. They have simply been put on sale for investors to find a deal.
Next, the markets are going to rebound. As investors, and speculators, try to buy the dip in prices, the result will be higher prices, simple supply and demand. Do I think now is the time to buy stocks? I think that if you are going to invest for a long period of time, and be consistent with your investing such as investing monthly or quarterly, and invest in companies that pay a healthy and stable dividend, then it is always the time to buy. I do think prices will go lower, but no one really knows how low they would go. The market will have a slight rebound, but this doesn't change the economic climate and conditions that caused the drop in prices in the first place. There is still real economic decline in Europe and a slowing of the global economy, there is a real danger of ebola and how it is destroying communities in West Africa, there is still real danger of ISIS, real problems with Ukraine and Russia, real problems with student loan debt in America, and there will be real consequences to the artificially low interest rates. All of these things affect a free market global economy, although they do not necessarily affect each business the same way. However, when prices are inflated, the pricing of these businesses are affected while the value of the businesses remain.
What does this have to do with stewardship? Markets fluctuate, but what shouldn't fluctuate is the way we manage our resources as well as our approach to a fluctuating market. If we panic, we allow our anxiety and fears to dictate the way we manage our finances. We should be aware of the potential consequences market fluctuations can have on our financial situation, but we should never operate out of fear.
Ultimately, prices need to revert back to the intrinsic values of the assets they represent. As assets go on sale, the true investors will emerge victorious in the coming years. Speculators lose in the long run, and investors should never panic when prices decline. Baron Rothschild said it best "The time to buy is when there's blood in the streets".