Stocks are crashing—that’s a great reason to sit tight
The red numbers in your 401(k) today might appear to vindicate warnings about an artificial-intelligence bubble and infirm economy. But don’t start tilting your portfolio toward full pessimism just yet. The S&P 500 opened down about 4% Monday, with the Nasdaq falling a larger 6%.
Investors have been selling the year’s best performers, concerned that disappointing second-quarter results from big technology companies such as Alphabet, Tesla and Intel are a sign that the AI frenzy is a fad. Also, consumer discretionary stocks have become the worst-performing sector in the S&P 500, as lackluster labor-market reports have raised worries that the Federal Reserve made a mistake by waiting until September to cut interest rates. Overseas, the Stoxx Europe 600 is more than 5% below where it was a week ago, whereas the Swiss franc, a common haven asset, is up roughly 5%.
The most eye-popping moves happened in Asia, though, where the Nikkei 225 plunged 12.4% Monday in the worst trading session since Oct. 20, 1987—the day that followed Wall Street’s infamous Black Monday. Yet it is precisely the breakneck speed with which Japanese equities tumbled that should give most investors a reason to remain calm.
As a guideline, sudden market selloffs are less dangerous than those that unfold progressively over time. This is because investors who rationally price in bad economic data often do so slowly, as it trickles in. Flash crashes, conversely, are often a sign that some tidbit of bad news made speculative bets go awry, triggering a cascade of trades, many of them automated.
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