Clients want to know: Why the sudden stock market drop?

Stumble, fall or crash?

Investors may be wondering what to make of the dramatic sell-off in the stock market after months of tranquility. A slide that started early last week led to a sharp dive in markets Friday and Monday. The combined two-day drop represented a 6.3% decrease in the Standard & Poor’s 500 index that undid the market’s gains for the year.

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Market professionals say there are still plenty of reasons to like stocks. But they can’t say definitively that the selling is over.

So what should investors do? Here are a few answers to two common questions they might have.

What just happened?

No one thing triggered this.

The markets took a marked turn downward Friday after the monthly U.S. jobs report showed that wages surged in January, representing the sharpest year-over-year gain since the recession. That stoked concerns about higher inflation because as companies raise pay, they often raise prices and that cycle can speed inflation.

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The Federal Reserve is already expected to raise short-term interest rates this year with the economy growing. But inflation worries raise concerns that the Fed will increase rates at a quicker pace. Higher borrowing rates can be a challenge for corporations over time as they want to borrow money to grow and it drives investors to bonds rather than stocks.

The selling continued Monday, in what most experts are saying is just an overdue correction. Some believe automated trading also played a role as the systems that buy and sell stocks may have been triggered.

How bad was it?

Not that bad, really.

The drop only erases a few months of gains. Plus, market pros have noted that declines of 10% or more are common during bull markets. There hasn’t been one in two years, and by many measures stocks are awfully expensive. The S&P 500 is now down 7.8% from its Jan. 26 record.

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“(Monday’s) market drop, while understandably unsettling to investors, just takes us back about two months,” says Greg McBride, chief financial analyst at Bankrate. “Market corrections are normal, no matter how nerve-wracking they are at the time.”

What should advisors do?

Communication is key, and now is the time to reassure clients. Later today, Advisor.ca will post insight from advisors sharing how they’re helping clients in the wake of the market drop.

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