What's Up With the Down Market?
"Trump Tariffs Send Stocks Lower!"
That, or words to that effect, is the headline in financial and political media everywhere. But is it true?
To some extent, yes. But not completely. There's more to the story.
First, let's look back a little ways to find out how we got here, and where we are.
The stock market took off like a rocket right after Donald Trump won the election in 2016. It's normal for stocks to go up after the uncertainty of an election is out of the way, but there's also no doubt many investors were looking forward to Trump's promised tax cuts, and a more business-friendly environment.
Stocks basically kept going pretty much straight up from the end of 2016 all through 2017, with only minor pullbacks. And that trend continued – indeed, accelerated – in the first few weeks of 2018.
Then, seemingly out of nowhere, the market started to fall apart just over a month ago. Stocks plunged into one of their most sudden corrections in decades.
And then it was over, in just two weeks. The selling stopped, and the market started to rally again. Stocks regained most of their lost ground. The correction was over. Or was it?
Well, no. In fact, some analysts had expected the market to fall back again – just as it's actually doing right now. But why?
The answer is simple: it's actually fairly normal for market downturns, including corrections, to have at least two legs down.
To give an extreme example, consider the Crash of 1987 (which was far worse than the minor correction we've seen this year). The crash ended in mid-October of that year. Afterward, stocks rallied sharply – but then they fell back once again into early December. But the market held up, and stocks started to move slowly but surely higher.
Other corrections have shown the same pattern: the market drops quickly, rallies, but then drops again (technical analysts call this a "retest of the lows," if you're interested in that kind of thing).
And so, many analysts expected stocks to drop again this time as well- just as it's doing.
Does this mean the President's talk about tariffs, and the related fears of a trade war, have nothing to do with this latest decline? Not necessarily. But it may also be nothing more than an excuse for some people to sell – for now, anyway.
The bottom line, and the bigger picture is this: first, the stock market needed a correction. It had gone up too far, too fast, from late 2016 to early 2018, and it simply needed a breather. This is normal. Think of a marathon runner. If he or she runs too fast for too long during a race, they need to slow down. It's basically the same with stocks. They can't go straight up forever.
Second, and more important, is this simple question: is the bull market over? So far, the evidence says no. Without getting into the weeds of various factors, the market appears to be healthy.
And that's the key issue because it means stocks will start going up again, and the market will come back at some point, once it gets this correction out of its system.
Drew Parkhill is the CBN News Financial Editor.
