Forbes Markets Reporters: How Today's Stock Market Plunge Rates Historically & What Could Come Next

Forbes

On "Forbes Talks," Forbes Dividend Investor Editor John Dobosz spoke to Forbes Markets Reporter Hank Tucker about the sharp stock market sell-off, what precipated these massive one-day moves, and what could come next.  Subscribe to FORBES: https://www.youtube.com/user/Forbes?sub_confirmation=1  Fuel your success with Forbes. Gain unlimited access to premium journalism, including breaking news, groundbreaking in-depth reported stories, daily digests and more. Plus, members get a front-row seat at members-only events with leading thinkers and doers, access to premium video that can help you get ahead, an ad-light experience, early access to select products including NFT drops and more:  https://account.forbes.com/membership/?utm_source=youtube&utm_medium=display&utm_campaign=growth_non-sub_paid_subscribe_ytdescript  Stay Connected Forbes newsletters: https://newsletters.editorial.forbes.com Forbes on Facebook: http://fb.com/forbes Forbes Video on Twitter: http://www.twitter.com/forbes Forbes Video on Instagram: http://instagram.com/forbes More From Forbes:  http://forbes.com  Forbes covers the intersection of entrepreneurship, wealth, technology, business and lifestyle with a focus on people and success.

Transcript

00:00Welcome to Forbes Talks. I'm John Dobis, joined by my Forbes colleague Hank Tucker,

00:08markets reporter and money and investing extraordinaire. We're talking today about

00:13this very steep stock market sell-off occurring on Monday, August 5th, which follows up on the

00:19heels of Thursday and Friday, which were sharply down days for U.S. stocks. Overnight, the Japanese

00:27Nikkei index had its worst single day since 1987, down 12%. South Korea's KOPPX was down 10%.

00:36These are extremely large one-day moves that you don't usually see in a stock market. So, Hank,

00:42what is behind all of this? We know that the interest rates in the United States are on the

00:46verge of coming down. The Fed declined to do it in July. It seemed like everything was okay on

00:53Wednesday and the bottom fell out on Thursday. What's your read about what's been going on?

00:58Yeah, Thursday was a pretty weak day. And then I think the jobs report that came out on Friday

01:04that showed a weaker jobs market, that the unemployment rate was higher than expected at 4.3%,

01:11spooked investors as well into Friday. And then they had all weekend to get a little

01:16more anxious and worked up, I think. And today at the open, it was down as much as 4%. Now,

01:22as today's gone on, it's gotten a little bit better. Now, we're only down a little over 2%

01:26in the S&P 500 compared to some of those really bad crashes in Japan and South Korea that we're

01:32seeing overseas. So, overall, as market crashes go, this is pretty tame. Obviously, 2% or 3% is

01:43nothing to sneeze at. But we're still only down 8% or so from the all-time highs of three weeks ago.

01:50But that's also making investors and experts I'm talking to

01:55not really willing to buy yet. They don't really think it's much of a buying opportunity. The

01:58valuations are still pretty high. So, we'll see how long this lasts.

02:03The months of August and September are traditionally pretty weak. October has

02:10the very nasty reputation for what it's done in the months of October of 1929,

02:15October 1987, and times like that. But more often, these declines, when we get them,

02:21start around this time of year, mid-hurricane season, and then hit their nadir or hit the

02:28peak of pain in October. So, there is some seasonality that's involved. But

02:34as far as stock market declines go, there's bear markets, and then there's just corrections. What's

02:39the difference between the two? 20% is the threshold for a bear market?

02:43Yeah, 20% is typically thought of as a threshold for a bear market. And as I said,

02:47we're still a long way away from that. We're only down 8% or 9%, depending on when you look this

02:51morning. And a correction is typically thought of as around 10%. So, we're pretty close to a

02:57correction. It's a real pullback. But if this becomes a bear market and this is a real recession

03:05we're heading into, as some are concerned about, then there could still be a long way to go for

03:10that. I just looked this up today that there have been 38 market corrections since the 1950s.

03:17So, they occur about every one or two years. As you said, 10% or more decline from the peak.

03:23And then they last for about, the worst of it is over six weeks to two months later.

03:29And they're typically, the market is hitting new highs four months after a correction hits. So,

03:35you know, it's hard to argue though. You weren't around maybe in the 1999 buildup,

03:41but you could just replace the word internet with artificial intelligence. And, you know,

03:46it was just like, there's nothing we can't do with AI. Oh, and NVIDIA was going to the moon

03:50and taking a bunch of other, the Magnificent Seven with it. So, you had this, let's not forget,

03:56even after the big declines, those stocks like Microsoft and meta platforms, even Apple,

04:03is up really nicely for the year. More than that for NVIDIA, but even those other large cap techs

04:10are up like 20% or more still for the year. Yeah. I mean, NVIDIA has just about doubled

04:15still even after a decline today and for the last month of, I think around 30%.

04:22That stock, it's still, if you bought it a month ago, then you're not-

04:26You're bumming. But if you bought it six months ago, you're still in heaven.

04:29It's still golden. So yeah, as long as, I don't think a lot of long-term investors are really

04:36sweating too much yet, but still, this decline over the last week or so, it's wiped out around

04:44two months of gains, which is very kind of just a blip as long as it doesn't snowball into more

04:53panic, more anxiety. We'll see what the Fed does to kind of stabilize and calm people's fears.

05:01People are expecting a rate cut at their next meeting in September, if not sooner. But yeah,

05:08overall- And that would be a huge,

05:09wouldn't that be a huge red flag to throw up by the Fed to say, oh my God, things are so bad,

05:13we needed to cut rates before our next meeting? Yeah, I think that could be kind of productive

05:17and just make people, free people out more a little sooner. So I wouldn't expect them to do

05:25that. But we'll see how things unfold the rest of this week.

05:28You know, the direction of the Japanese yen versus the US dollar also plays a role. I've

05:33been hearing a lot about the carry trade. The carry trade is when you borrow in a currency

05:39with low interest rates relative to the country where you want to invest. And people have been

05:43doing this by borrowing in yen-denominated debt and then buying US assets, whatever they are,

05:50the mag seven stocks. And that's fine as long as the yen keeps on going down against the dollar.

05:56But that trend has broken. And now the yen is going back up against the dollar.

06:00The Bank of Japan is holding rates steady or hiking moderately. And you have the Fed on the

06:05verge of massive rate cuts. So that unwinding is, if we're to believe it, on the institutional

06:12desks of the world, a big deal. Yeah. And that's certainly hurting the Japanese market,

06:18as you mentioned. It's not, maybe it doesn't reach a level of a Black Monday in the US,

06:22but it certainly was in Japan with a 12 percent decline, as you mentioned, at the start of this

06:29call. And so that certainly qualifies as a pretty major crash over there. And I think there's a

06:36saying that when the US sneezes, the rest of the world catches a cold. Or if the US has a cold,

06:41the rest of the world has pneumonia. And that's kind of playing out certainly in Japan and in

06:47South Korea. And the specific factors of what's going on over there with the yen getting a lot

06:55stronger, their central bank, as you mentioned, starting to hike interest rates has made that

07:02effect really amplified in Japan. But they had been one of the darlings of the market for a few

07:09months and they had been really an outperformer. But today wiped out the whole year's gains,

07:16Friday and today wiped out the whole year's of gains in the Nikkei index so far. So not good

07:22news for investors in Japanese markets. The rest of the world, it's kind of wait and see. And they

07:30all have their eyes on the US and what happens here. There are some places traditionally that

07:34you can hang out during bear markets or corrections or if you just want a lower volatility

07:39ride on stocks, the consumer staples sector. You had Coca-Cola, I think on Friday or Thursday of

07:44last week, hitting a new all-time high. There was news today that the Mars company, which makes Mars

07:51bars and other chocolate bars, is looking at buying Kelinova. And their stock was up like 14%.

07:58But those Campbell stocks like Clorox or Campbell Soup, Hormel Foods, Tyson Foods was up today about

08:054%. They tend to hold up better. They don't have the gains that these market darlings do on the

08:12uptrend, but they don't kick you quite as hard on the downside either. Yeah, they could definitely

08:16be safe havens if you're more of a bear, more of a pessimist and think you're a little worried about

08:22a recession coming. Those are definitely places that you could kind of wait this out. Utilities

08:29also a sector that usually does well. They've done well in the last two weeks for sure. Yeah.

08:36How about just money market funds? You're still making a 5% yield until the Fed craters that

08:40later on, but there's no shame in that. Yeah. I mean, that will only last probably

08:48maybe another month or two until they start cutting those rates. But yeah, for now,

08:53if you want a 5% annualized yield and are worried about the valuation still being pretty high,

09:02I think investors still don't really see this as a buying opportunity. So if you have a good reserve

09:08of cash that you want to put to use in a bear market, maybe you wait a little longer for the

09:13market to be down maybe 15, 20% from the peak instead of where it is now and keep getting that

09:185% in your money market account. And then by the time your rates are cut and that interest rate

09:25starts going down, maybe the S&P 500 will be a more attractive place to start plowing that money

09:32into. And let's not forget, the stock market is not really a place to have your utility bill

09:38or next month's rent or something like that. So it's a four to seven year general game.

09:45You've been rewarded much more quickly than that in the past few years, but generally you shouldn't

09:50put in money to the market that you don't need, that you're going to need for the next four to

09:56seven years. But in the long run, a person today who's 25 or 30 years old, when they're 60 or 65

10:03years old will look back, remember that day that the carry trade unwound? No, they won't. This is

10:09kind of a blip in an upward trend. Any other words of wisdom? We both talk to billionaires

10:15who manage money and stuff like that. It seems to me though, they never really give you a clear

10:20answer on where they think the market is going, unless they're no good and they just want to make

10:24a name for themselves. But have you heard anything on all the billionaires that you talk to?

10:30I haven't heard much of substance. I guess they keep a lot of their best

10:35secrets to themselves. But I think there is some real concern about the

10:42economy. I think they always want to qualify, be cautiously optimistic if they are optimistic.

10:49But no, I mean, obviously things have slowed down this year and over the last year or two

10:57and inflation has gotten worse. It is starting to get a little better come down from that trend now.

11:02But everything we hear about in the political campaign, the election season, some of that is

11:06real that people are feeling the price hikes. But I think it always comes down to everyone

11:14wants to quote Warren Buffett and be greedy when others are fearful. And so I think a lot of them

11:21will find a good buying opportunity, if not now. And Buffett himself has sold a lot. He's sold,

11:26I think, half his Apple stake. Half of his Apple. He might be a little fearful now though, too.

11:32He's got $277 billion of cash that he's waiting to deploy somewhere. So if you think he's really

11:40smarter than we all are, maybe you are a little more cautious now. You got that signal from him.

11:47But yeah, if that's the case, then 5% in cash now is not a bad move. But again,

11:59over the long term, if you zoom out five years, this is just a tiny blip and we're still higher

12:05than we've been in almost any other point in history other than the last two or three months.

12:09So I don't think it's a time to panic. As Buffett points out, it's best to own

12:15productive assets over other things in the long term history. As long as the population keeps

12:21growing, as long as we keep on doing business with each other, the market really in the long

12:27run is only higher. Yeah. So if you're my age, if you're 27, even if you're-

12:36Even 56 works out in this market. Yeah. Yeah. Just don't panic. Don't sell because

12:45if you sell on a day like this or in a week like this and you miss out on the

12:5210, 20% upturn that comes, a lot of times you don't get that back.

12:55Successful market timing requires knowing when to get out and when to get back in. And most people

13:01once you've freaked out and thrown in the towel, you're really not going to be so bold to catch

13:07stocks right at the bottom because you'll still be overly fearful. Good stuff, Hank. Thanks a lot.

13:13Thanks, John. That's Hank Pucker from Forbes. I'm John Dobis for Forbes Talks.

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