For months now, the markets have been enjoying a streak of prosperity. The Dow famously hit 20,000 points for the first time ever in January, and eventually passed 21,000. Meanwhile, the NASDAQ and S&P 500 have also been enjoying record highs.
Experts, however, have been warning that it can’t continue like this forever—and in fact, that the higher the markets climb, the worse things will be when they fall. Now it appears those experts have been proven right. The S&P 500 dropped by 29.45 points on Tuesday last week. That may not seem like much on the surface, but it’s a drop of 1.24%. This marked the end of a 110 day streak of calm—the longest S&P has had since 1996. The Dow likewise fell by 238 points on the 21st and is still declining.
What the Market Decline Means
Plenty of economic experts have speculated on just what the cause of this sudden drop might be. The more important question, though, is will it continue? And what can we expect going forward? To find that out, we go to the Volatility Index, or CBOE VIX.
While the S&P 500 measures current stock prices, the VIX looks at the S&P’s expected volatility over the next 30 days. Also known as the fear index, it looks at trends in a selection of important stocks, measures their movements, and averages them together to predict how the index as a whole will perform going forward.
In fact, those who follow the VIX would have had an early warning of this sudden, sharp decline. Earlier this month, even while the S&P was rising, the VIX was going up as well, indicating more volatility looming, and a large selloff and market correction around the corner.
And it looks like the VIX is rising again, having gone up a full 17% in recent days and hitting its highest level of the year so far. Of course, in context, its levels are still relatively low. The average for the VIX is around 20, and at currently a little over 13, things are generally still considered to be calm and safe.
Except that, looking around, things aren’t calm and safe. Expected volatility has been below average all year, but a 1.2% drop still occurred. So now, as the VIX continues to trend upwards, it indicates that the markets will continue to fall for the foreseeable future. And other data seems to support that conclusion, as economists and financial experts predict continued decline for both the Dow and S&P.
What You Can Do
This sudden drop in the markets is an important reminder that nothing goes up forever. If it rises too high, it’s likely that they’re overvalued and have turned into a bubble—a bubble which could burst at any moment. We’ve just seen the beginnings of that bursting, but the worst is likely yet to come. In fact, some experts warn that 2017 could see another stock market crash, as bad or worse than the one in 2008.
It’s important, under these circumstances, to protect your investments. Particularly if you’re saving for retirement, the losses caused by this kind of volatility can be devastating. The 2008 crash caused Americans to lose an estimated $2 trillion in retirement savings. So what can you do to avoid this? You need a safe haven.
The more you diversify your investment portfolio, the better protected you’ll be against sudden market losses. By attaching a portion of your nest egg to something outside the markets, you can avoid being wiped out in the face of a crash.
Some people choose to invest in the VIX. It trends upward as stocks are poised to go down, allowing you to hedge your investments. However, as we’ve seen, the VIX can experience volatility of its own, and even as it goes up, it doesn’t necessarily match the reality of plummeting stock prices in the present.
A much smarter investment is gold or silver. As physical commodities, they’re not subject to inflation and resist the volatility of the markets. In fact, as stocks go down, gold tends to go up, and silver usually follows. That means that even if you lose your investment in the markets, with a Gold IRA in place, you still have a cushion to fall back on and protect your nest egg for the future.
The losses we’ve seen in the markets over the last week cannot be ignored. It’s difficult to know for sure how things will play out, but all signs point to an abrupt end to the bull market we’ve enjoyed, and a steep decline for the foreseeable future. Don’t ignore the writing on the wall. If you protect your investments now, before it’s too late, you’ll have a better chance of weathering the storm and coming out safely on the other side.