I’m sure you're seeing the headlines.

After hitting new highs last month, markets dropped dramatically, erasing months of gains. (1)

To some, it may feel like the sky is falling.

Let’s take a step back and take a look at what’s going on.

(Scroll to the end if you want my takeaways.)

What’s behind the market drop?

A couple of major factors fueled the sudden selloff:

1. Weaker-than-expected economic data that sparked recession fears.

July’s soft jobs report triggered a recession indicator that caused U.S. stocks to sell off in fear. (2)

Though it does not appear that the U.S. is in a recession now, weakening economic data is increasing the risk that a recession will strike.

2. Speculative currency trading by corporate investors.

“Carry trading” is a risky strategy that involves borrowing money in a currency with a low interest rate (such as the Japanese yen) and then reinvesting the money somewhere else where returns are higher. (3)

This strategy has become popular in recent years because of Japan’s very low interest rates. Its success depends on cheap borrowing currencies and low market volatility.

However, that strategy is no longer paying off. Japan’s central bank recently hiked interest rates, and markets grew more volatile, hitting traders with a double whammy. The “unwinding” of these speculative investments triggered a global selloff as traders sold positions to cover losses.

Hard investing truth: there’s always a reason to sell.

Markets are always waiting for the next opportunity to melt down. That’s part and parcel of being an investor these days. There will always be something happening that can cause anxiety, fear, and the knee-jerk desire to sell. But panic selling in response to a market stumble is the wrong move for long-term investors.

Negative global events against rising stock market — Negative global events—and the accompanying market downturns—provide tempting reasons to sell stocks.

Selling and sitting on the sidelines typically means missing out on the best market days as investors sell the dip and turn positive again.

Though markets bounced back quickly, we're in an environment where volatility and selling pressure could continue. It's very common for markets to experience a selloff after reaching historic highs. We’re watching closely and monitoring the data, including possible Federal Reserve decisions (and chatter) that could move markets.

Some observations and opinions from your market technician:

August can be a volatile month. I remember Russia's financial crisis in August 1998 that led to the collapse of hedge fund Long Term Capital Management in October. (4)
In the midst of the dot-com crash and recession, August 2001 was a weak month, and 9/11 was just around the corner.
A little more recently, August 2015 saw the S&P 500 drop ~6% on Chinese economic and currency issues, even experiencing a "flash crash" on August 24. (5)
The Fed maintains an overall restrictive monetary policy by holding interest rates higher relative to recent inflation readings. The economy is still growing, but the rate of growth is slowing.
Based on what I see right now, calls for the Fed to lower interest rates in an "emergency" (off schedule) cut are unwarranted. The S&P 500 down about 8% from all-time highs 3 weeks ago does not constitute an economic emergency.
A benefit to rates being at elevated levels: If conditions deteriorate significantly, the Fed has ample room to reduce rates to help the economy.
There's still a chance for a soft landing⏤one in which the economy doesn't dip into a recession despite an aggressive rate hike cycle, similar to the 1994-95 hiking cycle. (6)
For the first time in years, bonds are playing their more traditional role as ballast in portfolios⏤smoothing out some of the rough ride from stocks.