The Beginner’s Guide to Investing

3 reasons why the stock market is plummeting—and what you should do

Kevin O'Leary: Here's how to win when the stock market crashes
Kevin O'Leary: Here's how to win when the stock market crashes

The S&P 500 and Nasdaq Composite are on pace for their worst quarter in seven years, as the stock market continued to drop on Thursday. The S&P plunged 2.4 percent and the Nasdaq Composite fell 1.9 percent, though both then began to recover.

Over the course of two days, the Dow Jones Industrial Average plummeted more than 1,500 points.

A mix of global events and indicators of an economic slowdown seem to be contributing to the sell-off. Here are a few of the main reasons investors are anxious, and how experts recommend you react.

1. Bond market is signaling doom

"For sophisticated bond market investors, no three words invoke more fear and debate than 'inverted yield curve,'" writes CNBC contributor Mitch Goldberg. The reason: Inversions are seen as bad omens because they can forecast slower economic growth and precede recessions.

Every U.S. recession for the past 60 years followed an inverted yield curve, though sometimes not until months or even years later.

The government issues Treasury bonds over different lengths of time. Typically, a long-term loan pays more interest, so a 10-year Treasury bond will pay higher interest than a two-year one. The difference between the interest rates is known as the "spread." When the 10-year is higher, the spread slopes up. But when interest rates on a two-year are higher than a 10-year, the spread slopes down, meaning the curve is inverted.

Banks make profit by borrowing short-term at low interest rates and loaning money long-term at high interest rates. When the spread goes negative, banks have less incentive to issue loans, because doing so will cost them money. This means businesses can't access loans they need, and that can have negative repercussions for the economy.

At this point, the two-year has not passed the 10-year but, on Monday, the three-year passed the five-year, which hasn't happened since 2011. A lot of investors are taking that as a bad sign, especially since, as Reuters reports, "economists and investors are mindful that a downturn is inevitable."

2. The ongoing trade war

After U.S. President Donald Trump met with Chinese President Xi Jinping last weekend, the White House announced that Trump will hold off on raising tariffs on Chinese products to 25 percent for 90 days. The Dow rose nearly 300 points after the announcement, because many investors favor free trade and fear trade wars.

However, the future of Chinese-American trade relations remains uncertain. On Tuesday, Trump threatened China if negotiations fall through, dubbing himself a "Tariff Man." In September, he said that, on top of the goods already targeted, he had an additional $267 billion in tariffs "ready to go."

The trade war is already taking a toll on some industries in the U.S. China has imposed a 40 percent tariff on U.S.-made cars. When duties raise costs for foreign buyers, they may buy fewer, or buy from somewhere else. After it came to light that these tariffs were not going to be rolled back this week, Volvo threatened to move jobs overseas.

And retaliatory Chinese tariffs have already cost Nebraska farmers a billion dollars in revenue, according to the Nebraska Farm Bureau.

3. The arrest of Huawei CFO Meng Wanzhou

On Wednesday, Canada announced the arrest of Meng Wanzhou, global chief financial officer of Chinese tech giant Huawei, on suspicion of violating U.S. sanctions. She faces extradition to the United States, Canada's Department of Justice said.

Huawei is the world's second largest smartphone producer, and the event could send ripple effects through the global technology supply chain. After the news of her arrest spread, share prices of the Huawei suppliers Samsung Electronics and Chinasoft International dropped.

The arrest is unsettling because investors fear it's even less likely now that the U.S. and China can reach a permanent trade deal. Until they do, many investors will remain skittish.

The easy answer that nobody wants to hear is, 'Keep calm and stay the course.'
Nick Holeman
CFP at Betterment

What should you do? Be patient

"The easy answer that nobody wants to hear is, 'Keep calm and stay the course,'" Nick Holeman, a certified financial planner at Betterment, tells CNBC Make It. "Although I 100 percent agree with that."

You're best off doing nothing but, "if you insist on selling some stocks, don't go all the way. Sell less than your gut wants you to, and always be aware of the tax consequences of selling," he says. "Don't stop your good savings habits just because you are nervous about the market. Instead, redirect your savings into a lower risk account or cash."

Joe Mallen, chief investment officer at Helios Quantitative Research, also advises patience: "Investors close to retirement should stick to their plans." He notes that it's helpful to have a diverse portfolio as the markets are fluctuating.

Advisors agree you should be comfortable with what you are invested in and aware that volatility is normal. "Even the best investment strategy in the world will struggle in certain environments," says Jeff Mills, co-chief investment strategist at The PNC Financial Services Group. "Patience is the key to long term wealth accumulation."

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