The 'big, big, big surprise' that sent the stock market tumbling on Monday


The S&P 500 fell nearly 3% on Monday, making Monday the worst day of 2019 for the stock market, following fresh threats in the ongoing trade spat between the U.S. and China.

Daily declines of this magnitude don't happen often. The S&P 500 has tumbled more than 3% only 72 times in the past 20 years, or less than four times a year, according to data analyzed by Grow. Monday's losses were part of a six-day market slump, during which this key benchmark fell almost 6%.

Violent swings in the market can rattle even the most seasoned market pros, but it's important to keep perspective. Experts recommend that if you're investing for the long haul, you ignore these types of sell-offs, because historically stock prices have always recovered — and it's anyone's guess how quickly that might happen. Trade was a major cause of bumpiness in the springtime, and the market went on to set a series of all-time highs.

In fact, as of midmorning on Tuesday, the S&P 500 was up more than 0.7%.

Here's what you need to know about the market's latest move — and what it means for you:

The market is reacting to 'a big, big, big surprise'

Last Thursday, President Donald Trump made a surprise announcement that he plans to impose an additional 10% tariff on $300 billion worth of Chinese goods. On Monday, China retaliated by allowing its currency, the yuan, to fall to its lowest level against the dollar in more than a decade before stabilizing it on Tuesday. It also halted imports of U.S. agricultural products.

"This has been a big, big, big surprise," says Hugh Johnson, chief investment officer and founder of Hugh Johnson Advisors. The surprise isn't so much that negotiations between the leaders of the two countries have broken down again, he says, but how aggressively China responded.

As a result of trade tensions, yield on the 10-year Treasury note fell below 1.7% Monday, the lowest level in nearly three years. That decline shows traders are worried that forecasts for both economic growth and corporate earnings growth are "simply too optimistic," Hughes said. "People are asking, 'How close are we going to come to a recession?'"

Over time, investors have had very good returns from stocks — that's not changed.
Hugh Johnson
founder of Hugh Johnson Advisors

Expect more bumps, but 'we're closer to the end of the situation'

Both Trump's planned tariff increases and China's currency devaluation "came out of the blue" and surprised market participants who weren't betting on an escalation in the trade spat, says Jamie Cox, managing partner for Harris Financial Group. The market could tumble even more in the days ahead as people make sense of the situation — and try to decide whether Trump will deliver a "tit-for-tat" response, he adds.

But Cox is optimistic "we're closer to the end of this situation now" and that leaders can come to some sort of agreement. That's because the currency devaluation suggests China is feeling the pain of higher tariffs on its economic growth and may be more willing to make a trade deal, he adds. The next round of "high-level" trade talks between the two countries is slated for September.

Meanwhile, Johnson says the market's action in the next few days will be key for understanding how severe professional investors believe the impact will be on the economy.

Market sell-offs create opportunities

This type of sharp market decline is "unnerving" but, Johnson points out, there have been many such sell-offs in the market's history and they've always created opportunities for long-term investors: "Over time, investors have had very good returns from stocks — that's not changed."

Market bumpiness related to currency fluctuations tend to be highly unpredictable, sharp, and short-lived, "and should be ignored by long-term investors," Cox says.

Instead, Cox says, long-term investors should look for opportunities. "Days like [Monday] are a gift and you should use them as such," he says. "If you were investing two weeks ago, you should be doubling down on days like this."

It can help to keep perspective. In late 2018, similar concerns about another recession helped fuel a market sell-off: The S&P 500 fell more than 19%. But stock prices bounced back this year. The S&P 500 even set a series of all-time highs — most recently on July 26, right before the latest sell-off began.

Even with the recent turbulence, the S&P 500 is up 13% this year, compared to a long-term historical annual return of about 10%. And the past decade has been one of the best-ever for investors.

"It's not the end of the world, and no investor should lose sight of that," Johnson says. "In time, this sell-off will be a thing of the past."

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