"Is the sky falling?"

I’m sure you saw the headlines.

I always tell folks they shouldn't give much credence to market headlines because, good or bad, it's just short-term noise.

But it's tough to completely tune things out when it's this noisy. 

After hitting new highs last month, markets dropped dramatically, erasing months of gains.

It felt like the sky was falling.

Let’s take a step back and look at what’s going on.

What’s behind the market drop?

A couple of major factors fueled the sudden selloff:

1. Weaker-than-expected economic data that sparked recession fears. 

July’s soft jobs report triggered a recession indicator that caused U.S. stocks to sell off in fear.

Though it does not appear that the U.S. is in a recession now, weakening economic data is increasing the risk that a recession will strike.

2. Speculative currency trading by corporate investors. 

“Carry trading” is a risky strategy that involves borrowing money in a currency with a low interest rate (such as the Japanese yen) and then reinvesting the money somewhere else where returns are higher.

This strategy has become popular in recent years because of Japan’s very low interest rates.

Its success depends on cheap borrowing currencies and low market volatility.

However, that strategy is no longer paying off.

Japan’s central bank recently hiked interest rates, and markets grew more volatile, hitting traders with a double whammy.

The “unwinding” of these speculative investments triggered a global selloff as traders sold positions to cover losses.

Hard investing truth: there’s always a reason to sell.

Markets are always waiting for the next opportunity to melt down.

That’s part and parcel of being an investor these days.

There will always be something happening that can cause anxiety, fear, and the knee-jerk desire to sell.

But panic selling in response to a market stumble is the wrong move.

Selling and sitting on the sidelines typically means missing out on the best market days as investors sell the dip and turn positive again.

Though markets bounced back quickly, it's possible the volatility and selling pressure will continue.

It's very common for markets to experience a selloff after reaching historic highs.

We’re closely monitoring the data, including possible Federal Reserve decisions that could move markets.

I'll post more updates as I have them.

Investors cannot invest directly in indexes. The performance of any index is not indicative of the performance of any investment and does not take into account the effects of inflation and the fees and expenses associated with investing. Past Performance does not guarantee future results.