Markets go up, the markets go down, but historically the stock market has trended up. For young investors who may have never seen a sizable market drop, recent volatility may provide a valuable lesson.
Yes, Virginia (and Vincent), the stock markets go down too. Or as legendary banker J. Pierpont Morgan is credited to have said, “The market will go up and the market will go down, but not necessarily in that order.”
What does that mean during the topsy-turvy capriciousness that has rocked the markets this month? If you’re a younger investor, who might have never seen a market correction, the answer for some may be, “don’t worry too much.”
In fact, according to some analysts, market downturns could be a good thing, as potential opportunities might be popping up. “A silver lining in all of this is that sharp and swift sell-offs have traditionally led to quick conclusions and rapid recoveries,” said Sam Stovall, chief investment analyst at CFRA Research.
A series of tweets Farley sent out on Friday may put things in perspective:
“The news over the past few days has been focused on market volatility. Allow me to add some context. While a 1,000-point swing seems dramatic in the current climate, this drop doesn’t even make the list of the top 25 percentage moves in history,” Farley wrote, noting that on Feb. 5, the Dow dropped by 4.6%. He reminds that the worse single-day drop, on "Black Monday," October 19, 1987, was 22.61%.
Farley said the last time volatility was elevated was during the 2016 presidential election. “Since that time," he said, "the Dow is up nearly 40%, unemployment is down 1%, GDP is up 1% and the underlying economy is strong.”
“As we all know, markets go up, and markets go down," he continued. "Periods of uninterrupted, smoothly increasing prices will be met with periods of volatility. That’s a function of our equity markets,” he added. Noting that market regulators have “worked hard” to temper volatility with a range of actions, rules and market mechanisms to temper volatility and to facilitate orderly trading across U.S. markets. “We saw those mechanisms work well” on Thursday, he said, adding, “This is why U.S. markets are among the most resilient in the world.”
For investors who have never known a market collapse—yes, Millennials, we’re talking to you—this freefall looks more violent than other crashes of the last 50 years, but it’s not more violent, and not too unusual, according to Thomas Farley, president of the New York Stock Exchange (see sidebar right). If you were listening to any of the hundreds of analysts pontificating throughout much of last year and into this one, stocks were looking overvalued. A correction was coming, they said.
What happened is that it took so long, and that during that hold up, values on many stocks kept rising. When that happens, complacency, and even overconfidence, can set in. Some analysts liken it to a spring that becomes coiled tighter and tighter such that, when it's released, it does so quite forcefully.
Millennials might be among the last ones to be worrying about what this correction—we’re not technically in bear-market territory here—might do to their retirement portfolios. Younger investors are still in the wealth-accumulation phase. Those in their 70s and 80s, well, that’s a different story. If you're in or nearing retirement, this correction might be a reminder to review your portfolio to see if it still matches your time horizon and risk tolerance.
While last week's market moves were large in terms of magnitude, it's the percentage swings that may matter most. As Stovall noted, markets tend to go back up. “If Friday was the ultimate bottom, which is impossible to know for sure, history says (but does not guarantee) that the three S&P 500 sectors and 12 S&P 500 sub-industries that fell the furthest during this decline present an attractive opportunity for the possible bounce ahead,” Stovall said Monday.
It’s true, it’s a lot more fun watching your portfolio grow than it is to see it shrink. But keep these points in mind as the markets wiggle and waggle their way through this gremlin of a market:
One final consideration: Investing for the long-term is a marathon, not a sprint. Sometimes the road is straight and flat; sometimes it's curvy with a cliff in view. But remember, too, that past performance is only that, and not a guarantee of what’s ahead.
All investing involves risk including the possible loss of principal.
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