The long-running global stock rally turned down sharply this week as the Dow Jones Industrial Average posted its largest-ever point decline, and as major indexes in the U.S., Europe, and Asia gave up their gains for the year. The Dow is nearing the definition of a correction, which we haven’t seen in a long time. Many inhaled sharply, to say the least.
Should We Be Worried?
There is one main question to ask yourself, as always: Have my goals changed? If not, then there is no knee-jerk reaction to respond to a down market. Many predicted a correction would come after the election in 2017, and the market has been waiting on tenterhooks since then for signs of a dip. Stocks have looked expensive by historical measures for some time now, but have been supported by some of the largest earnings growth for large-cap companies since 2002. The low-volatility environment we have been in makes a 5% correction seem shocking, but we must again look at history. A 5% drop ten years ago wouldn’t have drawn much attention, now it’s big headlines.
And it would take a lot more selling to erase all of the gains we’ve seen in the past year, to take the Dow from Thursday’s close of 23,860.46 down to the 18,332.74 that we saw at the close on Nov 8, 2016. Yes, the market is worried about interest rate increases and U.S. debt, higher wage pressure on corporate earnings, and other geopolitical concerns. But whatever forces are bringing the stock market down sharply, it’s not likely from the bursting of a bubble. Fear and greed often drive large short-term movements in the markets. The recent stock market ride — as frothy as it has been — doesn’t even come close to past market bubbles.
Lots of Noise
What we’re seeing is short-term noise. This week’s trading sessions have been certainly very loud. But we need to be focused on the long sweep of market returns, if we are to earn enough on our savings to beat the corrosive impact of inflation. Markets have been very good to long-term investors. We need to be able to look past the noise and ignore even a historic down day (and based on history, we should expect a big down day more than once every other year).
Keep Focus on the Long Term
Investing isn’t something that happens over the course of days or weeks, or even over a few years. Investing happens over decades. It’s easy to forget that with the wall of noise that the financial media is continuously sending our way. It’s a form of entertainment, a play-by-play of a rollercoaster ride. While it would be nice to say that you should just ignore the media, for most of us that’s hard. Instead, focus on building a portfolio that will help you stay disciplined over the long term. Don’t let fear be your guide in long-term investing.
We know that academic research into what caused past market bubbles cannot predict the future, but it can help explain things. Even Warren Buffett says there is no way to reliably predict markets in the short term, so people investing in his company – or any company for that matter – should be doing so for at least five years. The equity market is no place for short-term thinkers.
Even if the long-running bull market has come to an end and a new bear market has begun, the data does not show that the market was in a bubble and that it has now burst. We will take a deep breath and watch to see what happens next.