Well, what a day for the stock market. Most people watching the “tape” doze or become mesmerized. Today’s action caused airport travelers staring at CNN’s screen to miss their flights. Folks having lunch at the bar, picked at their meal, while watching the news (around the world, bartenders were busy).

Acharta.com (opens another page on your browser) provides you with the final market numbers as of Feb 27 – 5PM. Look at the numbers to get a sense of what happens on a day like today.

Stock market historians will record today as the 7th largest loss for U.S. markets. Today’s losses totaled about $600 billion in shareholder value.

Late in the afternoon on October 19, 1987, I asked a wise and weathered investor, “Where did the money go?” David answered, “Didn’t go anywhere, Ray. It just got revalued.” Of course, there will be more of these days.

    Facts to remember:

  • A market-correction is between 10% to 12% – If it happens from here, we go to Dow Jones 11,300
  • A bear market is 18% – If it happens from here, we go to Dow Jones 10,300
Investment Policy Statements (IPS) give you guidelines for market corrections. Usually, you will acknowledge in our IPS that you understand that markets go up and down within a range of 10%-20%.

You’ll always hear me emphasizing investing “across and within asset classes”. We do this to avoid asset correlation concerns. We don’t want all asset classes to trade in the same direction. One asset class should offset another (one up/one down). Today, all asset classes traded in the same direction, at least first glance suggests they were sold. Admittedly, some investors sought safety in bonds (a component to all asset allocation models, I recommend).

The stock market has temperament, personality, and a long-term memory. When professional investors or neophyte (some just downright cocky) investors think past lessons are preempted by new paradigms or patterns, they are most-often wrong. For example, an inverted yield curve might portend a recession; an economic recession means lower corporate earnings, and lower corporate earnings makes for lower stock prices. This is not an absolute rule, but it works most of the time.

    Now, look at sone of the factors affecting today’s market action:

  • Alan Greenspan used the “R” word; he suggested a 2007/2008 U.S. economic recession. Out-of-character speech for Mr. Greenspan
  • China’s government restricted buying stocks with credit cards (yes, investors charged their stock purchases) or using margin
  • The U.S, reported a drop in durable goods production. When new construction slows, durable goods orders slow too.
  • Sub-prime mortgages and their associated risk for banks (Wells Fargo is the largest sub-prime lender) and mortgage companies became more wide-spread
  • Pirate pressure, I mean peer pressure: “One for all; all for one.” Also known as “the Wall Street herd mentality”.

So what happens tomorrow (or today, depending on when you read this)? Perhaps investors will consider the market “over sold” and we’ll get a “bounce”. In fact, Birinyi Associates reminds us that in 1987 and 2001, the markets started to come back immediately.

Ned Davis Research purports that 73% of the time we finish the next day with a higher close after a major drop; in fact, the turn-around starts at 12:09PM (set your alarms).

So, keep it all in perspective, or maybe you didn’t think about it. That would worry me because equity markets don’t like complacence.

If you worried, remember what I tell my children, “Today is not forever.