For investors hoping for some holiday cheer heading into Christmas, Wall Street had other ideas. With the devastating losses adding to an already sour outlook for the broader financial sector, we can no longer deny the obvious: we are in a bear market.
Typically, trading sessions just prior to major holidays are quiet ones. Moreover, a theory exists called the “Santa Claus” rally, which forecasts higher prices near the end of December. Whatever your perspective, it’s clear that most people have other things on their mind than trading stocks.
However, in this go-around, investors were intently focused on self-preservation. The Dow Jones Industrial Average dropped a shocking 2.91%. The benchmark S&P 500 index wasn’t too far behind with a 2.71% loss. Surprisingly, the tech-centric Nasdaq absorbed the least amount of pain, down 2.21%.
But the bear market essentially became official when the Dow dropped more than 19% from its all-time high. Usually, analysts and economic experts consider a 20% drop as the barometer for a true bear market. The S&P 500 has already hit that exact percentage-loss.
Once the Dow achieves that dubious honor, no equity apologist will have a convincing countering argument.
Opportunity in the Bear Market
For those holding out hope that this selloff was isolated, Treasury Secretary Steven Mnuchin significantly hurt this thesis.
In a bizarre, unforced tweet, Mnuchin asserted that the federal government had ample liquidity available. Under normal circumstances, professional investors would barely blink an eye. But now that we’re in a fully-fledged bear market, everyone is reading between the lines.
Specifically, people are seeking motive. If Mnuchin emphasized credit availability, perhaps he fears a liquidity crisis. Given that he has an army of economists reporting to him, he may know that the jig is up.
Ironically, he thought that he could assuage fears. Instead, he may have worsened the bear market.
Still, with all the terrible news pressuring the investment sector, I wouldn’t give into panic. Moreover, I’d steer clear of conspiracy theories calling for the end of the world. A deflated environment like this provides forward-thinking investors a once-in-a-generation opportunity.
Consider for example the housing crisis. That event destroyed many families. At the same time, though, it enabled many folks to advantage record-low home prices. Today, those fortunate speculators probably wouldn’t be able to afford their currently-inflated home valuations.
It is the exact same principle in this bear market: be greedy when others are fearful. Just make sure that you’re considering fundamentally-sound blue chips rather than just over-the-counter junk stocks.