It's been hard to stomach the past few weeks...

We started the month with the worst week of 2019 for the S&P 500. The index lost $1.4 trillion of stock market value over four brutal trading days.

Then, last Wednesday, the Dow plunged 800 points. It was its worst percentage drop of the year, and fourth-largest point decline ever.

Welcome to volatility, my friends.

I know you're worried... So today, let's take a step back and see what exactly is going on in the market today. And I'll share what I expect will happen from here.

Let's start with why markets have pulled back...

On Wednesday, July 31, the Federal Reserve announced it was cutting rates by a quarter point because of headwinds in the economy. This was the first rate cut since 2008.

You would think investors would cheer this... After all, a rate cut is meant to keep an economic expansion going.

But investors were disappointed. They hoped for a 50-point rate cut instead of a quarter-point cut. And more importantly, they were expecting that Fed Chair Jerome Powell would indicate that more rate cuts are coming in the future. But while Powell didn't rule out more rate cuts, he didn't commit to any.

Stocks fell 1.1% in response.

Later in the week, it seemed like trade talks were falling apart when President Trump announced new tariffs on Chinese goods. Folks raced to hit the sell button.

Stocks fell 0.7% that Friday, putting the total loss for the S&P 500 Index at -3.1% for the week. It's the biggest one-week drop we've seen this year.

Then came last week. And things got even worse...

On Wednesday, the yield on 10-year Treasury bonds briefly fell below the yield on two-year Treasury bonds. That's historically been an early warning sign of a recession, with stocks peaking anywhere from six to 18 months afterward.

And with that, stocks crashed 3%. The Dow fell 800 points.

Since then, we've seen some signs of the panic receding. But these big drops show us there's real fear in the market right now.

There's a lot to fear. Even with the recent pullback, stocks are still near all-time highs and have lofty valuations. Investors don't see an end to the trade war any time soon. And it's hard to keep relying on the Fed cutting rates to justify pushing stocks higher.

Even so, I'm going to tell you to do the opposite of what has been going on in the market... Now is not the time to panic.

Here's what I believe... This is most likely not the start of a market crash. The market just hit fresh highs at the end of July, and consumer confidence was up near all-time highs, too. It only makes sense that the market has cooled down a bit.

We typically only see the "big drop" when there is a recession attached to a market pullback. And we're not in recession territory just yet. The economy is still in good shape, even though there have been signs of slowing growth.

For one thing, we've seen no real shift in the unemployment picture. Unemployment is still near all-time lows. Until unemployment starts to tick higher, the chance of a recession remains low.

For another thing, this is normal market volatility. It may turn into a bigger correction like we saw in late-2018, but nothing tells me it's time to panic and sell the farm.

Below is a chart of the S&P 500 from 2009 to today. You can see that 5% to 20% market drops are a normal part of a bull market...

Now take a look at the next chart...

We've only seen massive drops when gross domestic product ("GDP") growth is falling significantly...

And you won't see a 50% drop in the market without a recession. My indicators for the economy are not telling me we'll see a recession in the next couple months. Again, even with the inverted yield curve, it could be more than a year before the music stops.

Take this market drop for what it is – normal market volatility. Continue to be conservative and defensive. And most of all, don't panic.

Here's to our health, wealth, and a great retirement,

Dr. David Eifrig

Editor's note: Thanks to investor fear, one asset has been making powerful gains lately... and that's gold. So this week, we sat down with legendary gold investor John Doody. More than 15,000 viewers tuned in to learn about his unique gold strategy, which he says could help you lock in huge returns during this boom. You can still catch a replay of this event – click here to watch it now.

The bull market will likely continue over the next year. And this proven business is a great way to own U.S. stocks while earning a 2% yield...

Market Notes

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