The Market Went Down—What Now?
The S&P 500 has fallen more than 10%. The Dow drops more than 1,000 points.
I’m sure you’ve seen the headlines about the market movements over the past few days and might be worried. That’s not surprising. If you own stocks, they may have lost some value, which doesn’t feel great.
But, let’s put this dip into perspective. In Wall Street terms, we’ve been in what’s called a “bull market” since 2009. A decline of 10% or more in a bull market—which we’ve seen in the past few days—is called a “correction.” Bull markets in the past have averaged about one correction a year. The last one we had was February of 2016, so we’ve been overdue.
But here’s something else you should know: While Wall Street traders might be panicking a bit, for the average investor, like you, there’s no cause for alarm. The economy still appears to be on solid footing if you look at things like unemployment and company earnings. And in many ways, this market dip was expected.
OK, so this is normal?
First, yes. This is normal. The S&P 500 went up more than 20% in 2017, which is significantly higher than its average of 7% (adjusted for inflation). In a market that has increased so much so quickly, it’s normal to see a correction. On February 8, the S&P closed 10% lower than its high on January 26. And it could go lower. That, too, would be a normal for a bull market.
Second, the headline grabbing 1,175.21 point drop in the Dow on February 5, was a 4.6% decline from its 25,520.96 prior close. That was a big drop, but less than 10 years ago, in February of 2009, the Dow was at 8,207. A drop of 1,175 points would have been over 14%! Remember that as the index increases in value, larger dollar changes are smaller percentage moves.
Finally, remember that stocks are, by nature, volatile. Stocks have historically outperformed less risky investments. Be grateful for these temporary dips, because they help keep returns high over time. Since 2009, the S&P has gone from $683.38 to $2,581, counting the 10% drop over the past few days.
Why did the market drop now?
Again, we’ve had an exceptional advance in the market from late 2016 through last week. The market was anticipating a big tax cut and may have been a little ahead of itself. Second, in the most recent round of earnings reports, a few major companies like Apple and Google showed some revenue weakness. Third, we are beginning to see employment growth that is causing some to be concerned about inflation. The recent increase in market rates of interest, the 10 year treasury was yielding 2.7% last week, coupled with a change in the Fed Chairmanship is making some wary of faster or more extreme interest rate hikes. These are all good reasons for traders and hedge funds to take some money off the table, which led to the market drop we’ve seen this week.
So, what should I do when the market drops?
Investing in the stock market is best for long-term goals—say, a retirement that’s still a couple of decades off. Assuming this is you, this is business as usual. Take a deep breath. Try not to let the noise in the news make you too anxious. In fact, if you are a long-term investor and have some extra cash, you may want to put more money in the market while stock prices are low. And if the short term moves make you nervous, check your account less often—maybe once a quarter or even less.
Remember that time in the market—not trying to time the market—is the key to long-term investing success. Those who attempt to time the market rarely succeed in the long-term—and they often end up generating lots of short-term capital gains they regret at tax time. I’ve experienced many major market declines much worse than this: the 1987 crash, the dot-com bust, and 2009. In each of those, the people I still feel the worst for are those who sold in a panic at or near a short-term low, then walked away from investing and never came back. Many of them have little or no retirement savings. Those who gritted their teeth and hung in there generally did much better.
The only reason you should worry? If you have invested money in the stock market that you’ll need very soon. In that case, set up an appointment with a SoFi financial advisor, who can help you rethink your goals.
We’re here to help.
If you’re feeling worried, or even just have any questions about what’s going on and what it means for you, our team of licensed financial advisors is here to help. We can help you decide what the right move for you might be, or even simply offer guidance when things get scary in the market. Either way, we’ll reassure you that this is normal, and help you plot a path forward for your goals.
SoFi Wealth, LLC does not render tax or legal advice. Individual circumstances are unique and we recommend that you consult with a qualified tax advisor for your specific needs.
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