Ask Stacy: Why Are Stocks Tanking,

and What Should I Do?

Stocks are crashing. Time to panic?
By Stacy Johnson (http://www.moneytalksnews.com/author/stacy/) on January 19, 2016 / Photo (cc) by Krysten_N
(https://www.flickr.com/photos/krystenn/392132869/)

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(Editors note: This is an article we first published in October of 2014. Ive dusted it off
and updated it to fit todays environment. While the situation today is completely
different than things were in 2014, the advice remains the same.)
If youve got money in the market, youve got to be feeling a little nervous about now. As I write
this, the Dow Jones Industrial Average has plummeted more than 8 percent in 2016: Thats the
worst performance the stock market has ever turned in during the first trading days of the year.
Just last Friday, it dropped 391 points. Thats almost 2.5 percent.
Is it time to panic? Lets take a step back and look at where we are, why we got here and whats
likely to happen next.

Whats happening to the stock market?

Much of whats happening to the stock market is panic. Like hearing Fire! in a crowded theater,
investors are stampeding for the nearest exit. Whats being shouted in the Wall Street theater,
however, isnt fire, but words like China, oil collapse and recession.
As for China, there are signs its economy has been slowing down, which is being reflected in the
20 percent plunge its stock market has suffered over the past month. The Chinese stock market
doesnt directly impact ours. And its economy isnt all that critical to ours, since we buy a lot more
stuff from China than we sell to that nation. But as the worlds second-largest economy, big trouble
in not-so-little China could be a symptom of a worldwide recession that will eventually wash up on
our shores.
Things are also not great in Europe. The growth rate for the European Union has slowed to 0.3
percent: barely above recession levels. So from Berlin to Beijing, consumers are consuming less
and manufacturers are manufacturing less.
As for the U.S. economy, things arent too bad at least not yet. Our unemployment rate remains
at 5 percent half what it was during the Great Recession. Oil prices are in free fall, resulting in
gas prices as low as theyve been in this century. Thats putting more spending money in the
pockets of consumers.
Those low oil prices, however, while helping consumers, arent as rosy as you might think. Not only
can sustained low prices cost the jobs of those working directly or indirectly in the oil business,
they also can result in banks losing billions from bad loans to bankrupt drillers. Low prices on oil
and other commodities also are a sign of excess supply, which in turn is a harbinger of a faltering
economy.
And for a little salt in the wound, last month the Federal Reserve began raising interest rates. While
the first increase was small just a quarter of a percent the move shows that the easy money
gravy train is leaving the station. Stocks like low rates, not rising rates.
In short, the world has become a scarier place than it was just a few weeks ago. There are reasons
behind a falling stock market. The speed of the sell-off and the monster volatility weve seen over
the last two weeks, however, are tied to more than mere numbers. The selling has taken on a life of
its own as people do what they often do when Wall Street stumbles: Sell first, ask questions later.
Find help for common financial problems in our Solutions Center! (/solutions/)

What should you do?

The only way to trade during a market panic is not to. Panics are by definition irrational, so rational
thinking doesnt work. The thing to do at this point is to wait for the smoke to clear.
If American stocks were radically overvalued, the situation would certainly be worse. While our
market is overvalued by historic measures (http://www.multpl.com/table), its been a lot more so.
(The average price-to-earnings ratio for the S&P 500 is around 20, compared with 70 in January
2009 and 46 in January 2002.)
Also supporting stocks are interest rates. Yes, they went up last month, but theyre still low. Tenyear Treasuries are still paying around 2 percent, and banks are paying basically nothing. There
arent a lot of options other than stocks.
That being said, since at least part of the current sell-off is the result of irrational selling, now is not
the time to step up and be a hero. As an old Wall Street expression goes, Dont try to catch a
falling knife. Let the correction run its course, and keep an eye on the news.
I havent sold a share of stock in my online portfolio
(http://www.moneytalksnews.com/info/portfolio/). In fact, Im carefully monitoring the price of oil
and may buy some oil stocks for a long-term gain. Ill let you know if and when I pull the trigger.
As for you, unless youre over-invested, have too many risky stocks or are short-term oriented, Id
suggest hanging tough, at least for now. Rather than reducing my portfolio, when times get tough, I
reduce my expectations instead. I suggest the same for you.

The silver lining

There are no sure-fire investment systems guaranteed to create stock market profits. But theres
one that comes close. Its called dollar cost averaging.
Dollar cost averaging refers to investing a fixed sum of money at regular intervals. It works
because you buy more shares when theyre cheap and fewer when theyre not. As long as shares
dont permanently decline, this system will always result in profits over time. To learn more about
this and other investor basics, see Beginning Stock Investor? Heres All You Need to Know
(http://www.moneytalksnews.com/2013/07/05/beginning-stock-investor-heres-all-you-need-toknow/). But the point is, if youre investing monthly in a 401(k) or other investing account, when
markets drop, youre buying things on sale. Thats not a bad thing.
Bottom line? If your nest egg is exposed to the stock market, theres little you can do at this point.
But heres something not to do: Freak out and sell at what may turn out to be an inopportune time.
What do you think is ahead for stocks? Are you getting out? Buying more? Share your thoughts
below or on our Facebook page (https://www.facebook.com/moneytalksnews).

Got a question youd like answered?

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(http://www.moneytalksnews.com/forums/). Its the place where you can speak your mind,
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often look for questions to answer in this weekly column. You can also ask questions by replying
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(https://signup.moneytalksnews.com/).

About me
I founded Money Talks News in 1991. Ive earned a CPA (currently inactive), and have also earned
licenses in stocks, commodities, options principal, mutual funds, life insurance, securities
supervisor and real estate. Got some time to kill? You can learn more about me here
(http://www.moneytalksnews.com/author/stacy/).

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