Why Are Stocks Falling and How Far Can They Go?

After the past few weeks, one wouldn’t be considered crazy to be a little bit shaken and perhaps worried about the future. We’ve had an assassination attempt on a former president, the withdrawal of a sitting president from his reelection bid, escalation of tensions around the world, and violent protests in our nation’s capital (again). And on top of that, after a brief rally following the failure of the assassination attempt, markets have been sliding farther and farther down. It’s got investors asking why stocks are falling. And it’s got them wondering how far they can go.

Well, I’ve got some good news and I’ve got some bad news, and you know how that goes. So let’s just get the bad news out of the way right now and talk about how low stocks can go from here…

How Far Can Stocks Still Fall?

The answer to that question isn’t really a straight answer. But I’ll try to make it as straight as possible for you. Because stocks could fall a little bit more or a lot more and it all depends on how the market feels about the future about six months from now. I’ll get to that in a bit, but first, let’s talk about the better possibility. Because if markets feel confident about the future, we’re getting pretty close to a very strong resistance level that’s provided support for them in the past.

That’s a chart of the S&P 500. The green line is the 20-day moving average, a series of averages of price levels over 20-day periods. For most of the year, that’s been a support level. And it looked like it would be at the start of this drop. But as you can see, we’re through that line and sitting on the blue one now. That’s the 50-day moving average. And while it could act as support, it’s not likely to. So the next band the market might bounce back from is the red line, or 100-day moving average. For the S&P 500, that’s about 2.6% lower. For the Nasdaq and the Dow, it’s about 2% from where the market closed on Wednesday, July 24, 2024. So that could bring buyers back in and stop the bleeding.

But if markets don’t like what they hear from the Federal Reserve next week… or if they’re still concerned about what’s going on with the political situation… we could see a lot more selling. Because the S&P is only down about 3.6% from its recent peak. And the Dow is only down 3%. A correction is 10% and that’s something we could see if investors get nervous about the future in the coming days. The Nasdaq 100 is the only index that’s even close at a 7% drop from its recent high. But that’s because most of the selling has been concentrated in the Big Tech companies that make up the bulk of that index.

• Apple is down 4%
• Amazon has fallen 9%
• Google has dropped 9%
• Meta has crashed 13%
• Microsoft is down 7%
• Nvidia has cratered 13%
• Tesla has plummeted 18%

Why Are Stocks Falling?

So, now that we’ve covered how far stocks could keep going, let’s devote a little time to the reason and talk about why stocks have been falling. It’s another complicated answer that I hope to somewhat simplify for you. Because a big part of the reason stocks are falling is that markets are uncertain about the future. They’re predictive mechanisms. They’re not valuing companies based on what they’re worth right now. They’re valuing them based on what they’ll be worth in the future. And when they’re not sure the future looks so bright, they revalue companies accordingly. They operate on certainty, and when things are uncertain, they act up like impatient children. And things have been pretty uncertain lately. But that’s not the only reason stocks are falling…

You see, the bond markets are betting that the Federal Reserve is going to cut interest rates not once, not twice, but three times between now and December. And now the rumors I’m hearing say people are starting to think we might be in for an extra one starting next week. They’ve got good reason. Inflation data has been coming in the way the Fed wants it to. And at his testimony before Congress and his recent speaking events, the Fed chair has been talking more about employment. That’s the Fed’s second mandate — to keep unemployment low. And it can’t fight inflation and unemployment at the same time. But if the Fed chair is worried about unemployment growing, then that means he must be worried about the economy slowing. And if the economy is slowing, then those Big Tech companies that were going to be so incredibly valuable in the future just got a little less valuable.

So stocks are falling for a few reasons. They’re a complex system made up of machines and humans, investors and traders, buyers and sellers… There’s never one reason for them doing anything. But one reason they always fall is that uncertainty I spoke of earlier. If you’ve been watching them long, then you’ve already seen that markets can price in both good and bad news. It’s when they don’t know what the news is that they have trouble figuring out where the future is heading.

What Should You Do?

Now, I’m sure there quite a few investors asking what they should do with stocks falling. Especially now that I’ve told you they’ve got the potential to fall either a little or a lot more. So since I can’t be helpful telling you how far stocks definitely will fall from here, I’ll do it another way. I’ll tell you what you should do. But first, I’ll tell you what you shouldn’t do. And what you shouldn’t do is listen to anyone who’s telling you to sell it all and get out of the markets. If you’ve lost confidence in your investments, by all means, sell them. But only if something happened to change the reason you invested in them to begin with.

First, timing the markets is a fools errand. The majority of stock traders lose money. And the majority of internet influencers who claim they’re in the minority make the majority of their money by charging naive people for trading programs. And second, the biggest rallies come before the worst crashes. The people who were sitting on the sidelines watching markets go up all year are finally getting a chance to “go back in time” and buy low.

What you should do is get on our mailing list if you haven’t already and download our app (shameless self-promotion), get invested in the sectors that do well no matter what the stock market does (diversity isn’t just a buzzword), and become a member of our investor chat on Discord to exchange ideas with other like-minded fortune-seekers. I’ll be back soon with some information on some stocks that are bucking the trend and rising while markets fall.

To your wealth,

Jason Williams

@TheReal_JayDubs

Angel Research on Youtube

After graduating Cum Laude in finance and economics, Jason designed and analyzed complex projects for the U.S. Army. He made the jump to the private sector as an investment banking analyst at Morgan Stanley, where he eventually led his own team responsible for billions of dollars in daily trading. Jason left Wall Street to found his own investment office and now shares the strategies he used and the network he built with you. Jason is the founder of Main Street Ventures, a pre-IPO investment newsletter; the founder of Future Giants, a nano cap investing service; and authors The Wealth Advisory income stock newsletter. He is also the managing editor of Wealth Daily. To learn more about Jason, click here.

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