Calm on Wall Street: A turbulent week ends on a placid note

30 Aug 2015 | Author: | No comments yet »

How to avoid huge losses in the next stock market plunge.

Days after China threw the biggest scare into Wall Street in years, US stocks have come surging back and ended the week Friday on a placid note that suggested the worst may be over – for now. It was a brutal week that finished with a relatively happy ending for people paralyzed with fear about the stock market, but a disaster for some who tried to escape danger at any cost.

This week on Wall Street, investors experienced thrills, chills, tears and giggles as their investments plunged, soared, dropped, rose, dipped, moved sideways — and then ended about where they started. The Dow Jones industrial average fell a scant 11.76 points Friday, or 0.1 percent, to 16,643.01, capping a week that saw stomach-churning losses and gains of around 600 points per day. Despite a horrifying 1,100 point plunge at the start of the week, and more nail-biting downturns later, by the close on Friday the damage was not nearly as bad as you might have imagined. The Nasdaq composite added 15.62 points, or 0.3 percent, to 4,828.32. [W]ith or without a sharp slowdown, the bloom is off China’s rose – and that may be a good thing. On one side of the seesaw, there was terrible news out of China, suggesting that manufacturing there was slowing much more than economists had thought.

The market plunge may prompt people inside and outside China to take a more realistic view that incorporates China’s weaknesses and the transition from its liftoff era to the likelihood of slower growth in the future. If China, the world’s second-largest economy, really is slowing dramatically, then it will be buying far fewer commodities, like coal, copper, iron ore and so on. Before the six-day losing streak had ended, the Dow had plummeted 1,900 points and the S&P 500 was undergoing its first “correction,” a decline of 10 percent or more, in nearly four years. After being down 1,100 points stocks began to climb, and at a point when the Dow was down only about 150 points, people might have assumed they would bail out and escape any future danger. Reduced demand would beat down the developing countries that produce many commodities, and that in turn would slow the whole global economy and hurt a lot of currencies.

But stocks soared at midweek, cutting the Dow’s losses nearly in half, in a rally analysts attributed to bargain-hunting, signs that the Federal Reserve may hold off raising interest rates this fall, and a new report that said the US economy is growing at a more robust rate than previously believed. The concerns that triggered the sell-off remain: slumping oil prices, a slowing Chinese economy, weak corporate earnings forecasts and uncertainty over interest rates. “For the last few years, let’s face it, there’s been very little volatility,” said JJ Kinahan, TD Ameritrade’s chief strategist. “We’ve had a very impressive rally.

People with mutual funds often don’t realize that when they get cold feet about 401(k)s or any other investments, they can’t just get out of their funds on a moment’s notice. Not that we can’t go higher, but it’s not going to be an easy path to get there.” Despite the bounce-back this week, stocks are on course for their worst monthly performance in more than three years. So last Monday, a person might have decided to bail when stocks were down just 150 points around noon, but the loss they had to take was more like 600 points because that was the carnage in stock funds by the end of the day (4 p.m. eastern time when the market closes). To make matters worse, since nervous people sold their funds at the worst of times, they didn’t get the benefit of the recovery that came late in the week. Federal Reserve Vice Chairman Stanley Fischer said Friday that before the recent turbulence, there was a “pretty strong case” for raising rates in September.

People yanked $29.5 billion out of stock funds during the week through Thursday, the largest move on record since 2002, according to analyst Michael Hartnett of Bank of America Merrill Lynch. It always does.” 12.3: The percentage point decline in the Standard & Poor’s 500 index from its all-time high of 2,130.82, set in late May, and its close on Tuesday. The value of the funds fell precipitously before the selling actually could be completed, so people ended up losing far more money than they expected. If you want quiet, steady growth in your retirement savings, then you might want to close your eyes and brace yourself: Analysts are saying the volatility will continue, at least until the Federal Reserve’s intentions are clear. As measured by the University of Michigan Consumer Sentiment Index, Americans’ confidence is starting to falter, dropping 1.2 points to 91.9 this month, a report showed Friday.

Americans are becoming “more pessimistic in their economic and financial outlook due to the volatility in equity markets and worries over the financial issues in China and Greece,” IHS Global Insight economist Chris Christopher said in his analysis. “If the U.S. stock markets stabilize, consumer sentiment is likely to respond to fundamentals — lower energy prices, improved job prospects, a housing market that is gaining traction, and modest consumer price inflation. That means you might decide when you’ve lost 5 percent to sell, but maybe end up losing 10 or 20 percent by the time your order actually is concluded.

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