Stocks Plunge on Egypt Protests; Gold & Bonds Rise
Stocks tumbled Friday, as the widespread protests in Egypt caused investors to hit the sell button, relearning the lessons of geopolitical risk. What exactly is geopolitical risk? It's the risk that your investment returns could be negatively affected by political/government changes or instability in a country.
Here's what happened Friday as a result of the Egyptian unrest:
- Dow Jones Industrial Average: DOWN 166 points, 1.4 percent, to 11,823. Just one trading session can push aside talks ofDow 12,000, it turns out.
- S&P 500: DOWN 23 points, 1.8 percent, to 1,276
- NASDAQ: DOWN 68 points, 2.5 percent, to 2,686
- March crude oil:UP $3.70, or 4.3 percent, to settle at $89.34 a barrel. It was the biggest dollar and percentage gain since September 30, 2009
- April gold: UP $21.90, or 1.7 percent, to $1,341.70.Gold had pulled back recently, after trading above $1,400, but global uncertainty reminded investors that gold is more about fear right now, than inflation
- US Dollar Index: UP 0.53 percent against a basket of six other currencies
- 10-Year Treasury: prices UP 15/32, which pushed DOWN yield to 3.33 percent
- The Market Vectors Egypt Index (EGPT): DOWN 2.9 percent today and over 20 percent since January 14
When a geopolitical event occurs, investors sell risk assets like stocks and plow the proceeds into safer stuff, like U.S. government bonds and the U.S. dollar. They also enter into what I have called the "panic trade" - buying gold, which investors see as a "safe haven" during tumultuous times. And of course, when the event occurs in or near an oil producing country, it usually triggers a spike in crude oil prices.
Nervous investors may want to remind themselves of a few golden investment rules:
1. Investors must assume all sorts of risk, including geopolitical
2. A well-diversified portfolio earns its keep on volatile days
3. Rebalancing works: If you rebalanced at the end of the quarter or based on price movement, you will reduce much of your anxiety when the market breaks down
4. Expect the unexpected: the S&P 500 started the Friday session up 92 percent since the March 2009 lows. Sure it has been great, but on any given day, investors must remember that the bottom can fall out
5. Emerging markets (like Egypt) can provide a huge upside ... but, well, you know the rest
