Is the US Stock Market Crashing?

Throughout January 2022, the US stock market has been falling away with the Dow Jones Index down around 6 per cent while the S&P500 is down around 8 per cent and the NASDAQ is down around 12 per cent. Many experts are predicting that this current weakness is an indication that these markets are crashing but is this really the case?

What’s the difference between a forecast and a prediction?

While I agree that the US market is in a correction, this is vastly different to it crashing. I would also warn investors not to put too much attention on the noise that we hear from experts because it can be misleading. Let me explain.

There is a vast difference between a forecast and a prediction, which investors typically misunderstand. A forecast is what an expert believes will occur in the future based on information they know today. That said, they have no control over the macro elements that effect the economy such as COVID, interest rates or Government decisions that may affect the market. As such, they may change their forecast as new information comes to light, which may result in the original forecast changing.

A prediction, on the other hand, is a definite statement that something will occur in the future and this is where investors tend to make mistakes because all too often they make their investment decisions based on what they believe is a prediction rather than what might occur.

Let me share a story about one investor who contacted me in the last week, they remarked: “Unfortunately, I have watched too many US YouTube shows and as a result, early last year I pulled nearly 700k out of the stock market and put it into cash based on their outlooks; i.e. markets are in a bubble, stocks overpriced, mega crash coming.” The investor went on to say that being in cash for the last year resulted in them missing out on the gains they would have otherwise achieved in our market.

Given that the Australian and US markets have been falling over the past few weeks, investors have been looking to experts for answers. Let me be clear, right now the markets are not crashing, we are simply experiencing a normal cyclical correction and, as such, the S&P500 may fall 15 per cent or slightly more from its previous high. An important piece of advice that investors need to remember, you do not buy an index, instead you buy stocks. Therefore, regardless of what the market is doing, investors should only ever buy or sell based on what the stock is telling them.

What were the best and worst performing sectors last week?

While all sectors in the Australian stock market were down last week, the best performing sectors included Energy down just 0.12 per cent followed by Consumer Staples down 1.39 per cent and Materials down 2.05 per cent. The worst performing sectors included Information Technology down 4.41 per cent followed by Healthcare down 4.35 per cent and Communication Services down 3.68 per cent.

The best performers in the S&P/ASX top 100 stocks included JB Hi-Fi up 5.83 per cent followed by Northern Star Resources up 5.70 per cent and Worley up 3.94 per cent. The worst performing stocks included BlueScope Steel down 10.41 per cent followed by Reece down 9.11 per cent and NEXTDC down 9.00 per cent.

What's next for the Australian share market? 

Last week I mentioned that the All Ordinaries Index was not as bullish as we might like to think and the move down last week certainly confirmed that given that the market fell 2.94 per cent to close at its lowest point since October 2021.

Since achieving a new all-time high on of 7,926 points on 5 January, the market has fallen 5.86 per cent, which is the second largest fall since the current bull market started in March 2020. So, once again, I would encourage everyone to exercise caution when selecting stocks, as the current move down could last a few more weeks.

Given that our market has not experienced a major fall since the COVID crash in February 2020 and has only fallen over 5 per cent on two occasions since then, we need to be mindful that the current fall may be longer in both time and price. Given this, it is possible that our market will fall below 7,000 points. That said, one thing I would like to make clear is that I do not believe our market will crash this year, so investors would be wise not to make any rash decisions.

For now, good luck and good trading. 

Dale Gillham is Chief Analyst at Wealth Within and international bestselling author of How to Beat the Managed Funds by 20%. He is also author of the award winning book Accelerate Your Wealth—It’s Your Money, Your Choice, which is available in all good book stores and online.