Stocks are being sold, but why?
After a good beginning of the year for the stock market, coupled with excellent earnings reports, investors find themselves in the middle of a nasty correction. And Dock Street portfolios have not been spared.
At this early stage of a drop in prices, we never really know what’s going on. The headline writers try to tell us, but a month or so later, when stock prices have recovered (or at least stopped dropping), we discover what actually triggered the correction.
The term “Correction” is stock market jargon for a short-term drop in prices with no obvious cause. The common definition is a fall in prices of 10%. Investors need to remember that a typical year includes at least one such pull-back. It’s a feature of stock investing, not a bug.
One thing that all corrections have in common is something we call “forced selling.” That occurs when investors face losses in one area of their portfolio, usually the part that was purchased with borrowed money. The debt is what forces that investor to raise cash in a hurry.
The easiest place to raise cash in a hurry is the sale of large companies. There are always ready buyers for the stocks of large businesses, such as Microsoft. So if the bank or broker has called in a loan and you need the cash by next Monday, you know you can get it by selling Microsoft.
Better still, Microsoft just recorded spectacular financial results, which makes the stock even easier to sell.
So our view is that the current market weakness is a normal, short-term drop in prices that has little to do with the financial performance of the businesses being sold.
There may be opportunities to buy in the next few weeks, but no need to sell.
Best regards,
Daniel A. Ogden
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