In this week’s commentary, we want to draw your attention to a significant market anniversary. Five years ago, on May 6, 2010, the U.S. stock market experienced a “flash crash” when the Dow Jones Industrial Average plummeted nearly 1,000 points in minutes, erasing almost $1 trillion in market value. The Dow immediately reversed itself and regained much of the lost ground that day. The event, caused by a large institutional trading program, was the largest single day drop in market history and caused an immediate media frenzy.[1]
In the weeks after the crash, news outlets blazed with headlines like: “Mean Street: Crash – The Machines Are in Control Now” and “Was Last Week’s Market Crash a Direct Attack By Financial Terrorists?”[2] Fear mongering by talking heads led many investors to worry that they were outclassed by big traders. A London-based trader was indicted last month for contributing to the 2010 crash by placing fraudulent orders that helped spark the selloff.[3] Fortunately, the flash crash was a miniscule blip on the market radar and ended up having very little effect on most investors.
So, what have we learned in the five years since then?
Despite panics and flash crashes, financial markets are still functioning. You’ll always find someone to tell you that the sky is falling and markets won’t recover from some event. Though the past can’t predict the future, U.S. markets have survived panics, crashes, bubbles, and crises and risen again.
Today’s markets are volatile and unpredictable. Smart investors don’t worry too much about what markets are doing this week, this month, or even this year. Instead, they focus on their own financial goals and create strategies that can withstand challenging market environments.
Flash crashes (or some other minor event) could happen again. Today’s markets are flooded by orders generated by sophisticated trading programs and institutional investors. Though Congress acted swiftly to institute “circuit breakers” that pause trading in stocks that experience a violent swing, it’s possible that another confluence of events or intermarket feedback loop could cause a similar problem in the future.[4] Since we can’t predict these “black swan” events, we work hard to build prudent strategies and carefully manage risk.
Things aren’t always as bad as the media makes them out to be. The media makes money on eyeballs and shocking headlines. It’s absolutely critical to both your portfolio and your mental health that you learn to tune out the noise and focus on fundamentals. One of the greatest advantages of working with financial professionals is that we keep an eye on economic and market events for you. We are also trained to take emotion out of the equation and make rational decisions in the face of market movements.
If you’re ever worried about where markets are going or have questions about how events affect your financial picture, please reach out to us. While we can’t predict markets, we are always available to offer reassurance and answer questions.
HEADLINES:
Jobs rebounded in April. U.S. job growth surged in April, and the unemployment rate dropped to a multi-year low. Tempering the good news, the March report was revised to show that just 85,000 new jobs were created.[5]
Eurozone economy grew in first quarter. Despite worries about Europe’s weak growth prospects, experts believe that the Eurozone economy may have grown at a faster pace than the U.S. economy.[6]
Despite drop in sales, wholesalers increase inventories in March. Wholesalers, the firms that supply U.S. retailers, slightly increased their inventories in March in anticipation of Spring-led retail demand. Higher retail sales would spur restocking and boost their sales.[7]
Puerto Rico braces for austerity measures. Faced with financial shortfalls and $72 billion in public debt, the U.S. territory slashed its proposed budget and requested help in finding a solution to the fiscal crisis. If a solution is not found, the Puerto Rican government could stop debt repayments.[8]
Quote of the Week:
“If you have knowledge, let others light their candles at it.” – Margaret Fuller
Click here to view full newsletter with reference articles, tax tips, golf tips, recipe of the week and more!
Notes on featured image: All index returns exclude reinvested dividends, and the 5-year and 10-year returns are annualized. Sources: Yahoo! Finance and Treasury.gov. International performance is represented by the MSCI EAFE Index. Corporate bond performance is represented by the DJCBP. Past performance is no guarantee of future results. Indices are unmanaged and cannot be invested into directly.