Beyond the Headlines: Here's the Real Reason Stocks Fell Today

Stock market volatility is back -- and that's a good thing.

Feb 3, 2014 at 7:00PM

Although we don't believe in timing the market or panicking over daily movements, we do like to keep an eye on market changes -- just in case they're material to our investing thesis.

January produced the worst stock market performance since May 2012 and February has not gotten off to an auspicious start, as the benchmark S&P 500 index lost 2.3% on Monday, while the narrower Dow Jones Industrial Average (DJINDICES:^DJI) fell 2.1%. Small-capitalization issues -- which outperformed their large-cap brethren last year -- fared even worse, as the Russell 2000 Index posted a 3.2% drop.

Meanwhile, the "fear trade" was a winner today, as the SPDR Gold Shares (NYSEMKT:GLD) rose 1%. The VIX (VOLATILITYINDICES:^VIX), a measure of investor expectations for stock market volatility over the next 30 days that is known as "Wall Street's fear gauge." gained 16.5%, to close above 20 for the first time since December 2012.

For the S&P 500, today's decline was the worst since a 2.5% loss registered on June 20, 2011. At the time, Bloomberg explained that "global equities tumbled after the Federal Reserve said it may phase out stimulus and China's cash crunch worsened." Today, Bloomberg highlights "data from China to the U.S. [signaling] a slowdown in manufacturing" as the precipitating factor. The U.S. manufacturing ISM index dropped sharply to 51.3 in January, suggesting a slowdown in manufacturing output (a reading above 50 indicates growth).

Bloomberg's explanation may be true, as far as it goes; however, as the Financial Times' Robin Harding pointed out, "the ISM's weakness was most likely due to freezing weather in January -- so it is not sufficient evidence to declare a new U.S. slowdown" before adding that [my emphasis] "it was enough to rock markets that have become blasé about economic risks."

Which gets us to the core of the matter: Slowing manufacturing is not the underlying cause of today's stock market decline, it is simply a catalyst. Instead, it looks to me as if we may we witnessing the first results of a collision between two (related) factors:

  • Stock market values that became overextended after a 30% run-up in the S&P 500 in 2013.
  • A market that is rediscovering risk (i.e., normalizing) as the Federal Reserve begins to slow the extraordinary stimulus it has been providing asset markets through its bond purchase program.

Is this cause for concern? Not for genuine, prudent investors -- those who are neither leveraged, nor short-term-oriented. After all, volatility is a normal characteristic of the stock market. Since 1957, the S&P 500 has experienced a 10% correction nearly every one and a half years, on average; the last correction began more than two years ago in the summer of 2011.

Furthermore, for stock-pickers, there are attractive opportunities in this market: Last week, I pointed out one such situation, as the market overreacted to Apple's fiscal first-quarter earnings report. If we get a proper correction, there will be others; if you're a net buyer of stocks, that's a prospect you ought to be excited about.

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4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

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That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

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David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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