The market must be into Snoop this week, because it’s dropping it like it’s hot.
Starting with a steep decline yesterday, the Dow and S&P 500 (stock indexes that track a group of big, public companies) are about 4% lower than the all-time highs they hit a few weeks ago. The scary part to investors is that the fall happened in a day and a half, and many are thinking this is the start of a longer decline. But before we all panic, let’s talk about why the market is down, and what you can do about it.
There are two main culprits affecting the stock market right now:
- Oil slipping to a low
Crude oil has been in decline for the past 6 months, and dropped firmly below $50 a barrel today. That’s 55% lower than its high of $107 in June, and the lowest it’s been since April 2009, during the recession.
Oil is mostly down because of oversupply, as the U.S. and Canada have been producing more oil recently. In response, Saudi Arabia has refused to decrease its supply and dropped its prices. On top of that, Europe has slowed its demand for oil, further putting pressure on prices.
While the decline in gas prices is great for us as consumers, with gas averaging $2.20 a gallon, it’s bad news for the global economy, as many big corporations are taking a hit from oil. That’s why the stock market is tanking in response.
- Greece not playing by the rules
Remember a few years ago, when Greece was so broke it had to be bailed out by the other states? And remember how Greece was supposed to cut down on spending in return? Don’t worry if you forgot about that period – apparently Greece forgot too.
Greece looks like it might elect a party that wants to reverse a lot of the austerity (reduced spending) measures that Greece had agreed to in exchange for its bailout money. That could cause Greece to leave the euro. Europe has been under some economic pressure as of late, so a Greek departure might cause serious instability.
In response to the news, European stocks tumbled and the euro hit a nine year low. And considering that Europe is a major trade partner with the U.S., Europe’s market weaknesses hurt our market as well.
So, now that we know why the market is falling, let’s talk about how you can respond.
First of all, let’s put things in perspective. My number one advice – do not freak out! If you hear anyone talking about a “market correction,” feel free to let them know they’re wrong. A market correction is when the market drops about 10% from a recent high, and we’re not even halfway there yet.
Remember when I told you not to panic during the market dip in October? The Dow hit a record high of 18,000 only two months later. The same philosophy applies here: I am not planning on selling any of my stocks, and will wait out the dip.
While I’m not selling any positions, I’m debating whether I should add to my portfolio or sit still. Many analysts are calling for further declines in the market, and I agree that the situation could worsen until oil prices stabilize. That said, I think there is an opportunity in the next week or so to get stocks at a good value.
My plan is to watch the market this week, and possibly buy stocks that I wouldn’t mind holding even if they decline further. For me, that means blue chip stocks with strong cash, low debt, and low price to earnings ratios. I’m personally eying Apple (AAPL) as a potential buy this week.