A stock market shock refers to a sudden and significant event that causes a rapid and often unexpected change in stock prices or the overall market. These shocks can lead to dramatic increases or decreases in the value of stocks and are typically caused by factors such as:

1. Economic Events: Major changes in interest rates, inflation, or GDP growth.

2. Geopolitical Events: Wars, terrorist attacks, or political instability.

3. Corporate Events: Bankruptcy, fraud, or a major company missing earnings expectations.

4. Natural Disasters: Earthquakes, hurricanes, or pandemics that disrupt economic activity.

5. Market Sentiment: Sudden panic or over-enthusiasm driven by herd behavior.

6. Policy Changes: New government regulations, tax changes, or central bank actions.

For example, the stock market crash of 1987, also known as Black Monday, was a shock where the Dow Jones Industrial Average dropped 22% in a single day. Similarly, the onset of the COVID-19 pandemic in early 2020 led to a sharp shock as global markets reacted to uncertainty and economic disruptions.

Stock market shocks often create ripple effects in the economy, affecting investor confidence, consumer spending, and business investments, and today, January 27th, 2025 - we had one!

Today’s Stock Market Shock

Today's stock market shock was driven by concerns over a new AI model from China's DeepSeek, which threatens U.S. tech dominance. The Nasdaq fell 3%, with Nvidia losing $589 billion in market cap value - the largest single-day loss in U.S. stock market history.

DeepSeek's AI app, which supposedly can match ChatGPT's capabilities but with much lower costs, had Wall Street swiftly reassessing valuations amid fears of increased competition. So what can one do in the aftershock?!

How To Handle a Stock Market Shock

Handling a stock market shock as an investor requires a combination of preparedness, emotional control, and strategic action. Here’s a roadmap:

1. Stay Calm and Avoid Panic

• Market shocks can trigger emotional responses, but rash decisions often lead to losses.

• Take a step back and avoid making impulsive trades. Remember that market volatility is a normal part of investing.

2. Review Your Investment Strategy

• Revisit your investment goals, time horizon, and risk tolerance. If you’re a long-term investor, short-term shocks may have little impact on your ultimate goals.

• Ensure your portfolio aligns with your risk tolerance. If it doesn’t, consider gradual adjustments once the market stabilizes.

3. Diversify Your Portfolio

• Diversification helps reduce risk during market shocks. A mix of stocks, bonds, and other asset classes can cushion losses.

• Include investments in different sectors, geographies, and asset types to minimize exposure to a single event.

4. Avoid Timing the Market

• Trying to predict the bottom or top of the market is extremely challenging and often counterproductive.

• Stick to a disciplined investment approach, such as dollar-cost averaging (investing a fixed amount regularly, regardless of market conditions).

5. Reassess, Don’t Overreact

• If you’ve done your research and chosen solid investments, market shocks are typically temporary.

• Reassess individual stocks or funds to ensure they still meet your criteria. If the fundamentals are unchanged, you may not need to act.

6. Look for Opportunities

• Market shocks can create buying opportunities as high-quality assets may temporarily drop in value.

• If you have cash reserves, consider taking advantage of lower prices to invest in undervalued assets.

7. Maintain a Cash Reserve

• A cash reserve can provide peace of mind and liquidity during volatile times.

• Avoid selling investments at a loss to cover short-term expenses by keeping an emergency fund.

8. Seek Professional Advice

• If you’re unsure about what to do, consult a financial advisor - like Leverage Financial Advisory!

• They can provide guidance tailored to your financial situation and help you navigate the shock effectively.

9. Focus on the Long Term

• Historically, markets have recovered from shocks and crises over time.

• If your investment horizon is long-term (e.g., for retirement), temporary declines are often just bumps in the road.

10. Educate Yourself

• Understand the causes of the shock and how it might affect your investments. This knowledge can help you make informed decisions rather than emotional ones.

By staying disciplined, prepared, and informed, you can weather market shocks and potentially use them as opportunities to strengthen your portfolio.

Thanks for reading and have a great week ahead!

Brian Bond, CMT