Investors have kept a tunnel vision for years, shrugging off possible threats, and continuing to buy. But a wave of selling has smashed major indexes, with the S&P 500 dropping 6 percent last week.
For years there have been threats of government shutdown, a possible euro collapse and near U.S. debt default. And now finally, buyers are hard to find. The dramatic drop in the S&P 500 has been its worst low-point since 2011 which puts it close to what Wall Street calls a “correction,” a fall of 10 percent from a recent high, according to the Charlotte Observer.
But in the bull market, corrections are natural pauses and experts say this one is way overdue. With the usual drops coming on average every 18 months, this last stretch lasted four years, so it has been no surprise to regular investors.
And this huge trigger for selling is a clear sign of the slowdown in China’s economy, but that was not the only development weighing down the market.
China is the second biggest economy in the world, so what happens there, is very important on a global economic scale. Their falling market set off a dip in all commodities worldwide including iron, copper and oil. Oil dramatically dropped in price last month which triggered worry for traders. On Friday, it dipped below $40 a barrel, its lowest price in six years. And if that price continues to drop, the S&P 500 is predicted to drop with it, with drillers and other energy companies comprising a large amount of that index.
But the drop in oil prices means people are saving money at the gas pump which usually sets off more spending at stores creating a faster-growing U.S. economy. But, right now, most Americans are choosing to pay off debt with their extra cash instead of going shopping.
“Household finances are growing more healthy … but you want to see a pick-up in spending, too,” said Tim Courtney, chief investment officer of Exencial Wealth Advisors.
As for the S&P 500, their 200-day moving averages, which the two indexes pierced on Thursday, helping to fuel selling, caused both indexes to drop 2.1 percent in one day before further plummeting on Friday. The only good news about that, is the last time it broke through its 200-day moving average back in July, it completely bounced back after only a few days.