When the stock market takes investors on a bumpy ride—as it has this week—it can be difficult to heed that expert advice to “keep calm and carry on.”
But it’s a sound strategy.
The reason for stomach-churning declines may change—to blame currently is uncertainty surrounding the status of trade talks between the U.S. and China—but the end result is the same. History proves that stock prices have always recovered, even after the worst of the market’s declines.
Keeping perspective on your long-term goals, along with what’s actually happening during a market sell-off, can help you to avoid making a decision you’ll later regret. Here’s what you need to know:
If there’s one thing investors can agree on, it’s that they hate surprises. And even though investors have waited months for some news on a trade deal between the U.S. and China, it was a couple tweets from President Donald Trump on Sunday that initially got them spooked.
In those tweets, Trump said the U.S. would boost tariffs on imports from China—and on Friday, it increased tariffs from 10% to 25% on $200 billion worth of Chinese goods. Earlier in the week, Trump tried to offer assurance a deal would come through, then later said China “broke the deal”, and on Friday said there's "absolutely no need to rush" on a trade agreement. The two-day talks ended Friday, with Treasury Secretary Steven Mnuchin calling them “constructive.”
“It’s really hard to tell right now what the news will be,” Hugh Johnson, the chief investment officer and founder of Hugh Johnson Advisors, in Albany, New York, told Grow earlier in the week.
All that uncertainty has played out in the market, with the S&P 500 falling about 3% this week through mid-Friday. To put that in perspective, this index now is back to levels last seen in late March.
What’s more, the S&P 500 set an all-time high last week. Whenever the market’s at an extreme level, that increases the odds that subsequent moves will be more exaggerated, Johnson says.
But even if the developments with the trade talks prompt a further market tumble, from Johnson’s perspective that’s not a bad thing for long-term investors. That’s because he believes stock prices are overvalued currently. If they come down more, it will be a good opportunity to buy at lower prices again. “Behind every dark cloud is a silver lining,” he adds.
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While there’s been an element of surprise this week, one difference is that the negotiations are happening in the public—which has also contributed to the market’s bumpiness.
“We’re watching the sausage being made,” says J.J. Kinahan, chief market strategist at TD Ameritrade. Although trade is currently the biggest unknown for investors, what really drives stock prices over the long term is how companies are performing, as measured by their earnings or profit.
“You have to invest in companies you trust longer term that are growing their businesses,” Kinahan says—and this is an opportunity to reevaluate your strategy. “Take a breath and say, ‘OK, what did I think about the company before and what is my realistic assessment of how this will affect the company longer term?’”
Bigger concerns in the stock market outlook include the pace of economic growth, what the Federal Reserve is doing with interest rates, and corporate growth.
Looking at the big picture, is this week likely to be a turning point for the market a year from now? “No, it’s not going to be,” Johnson says, adding that this is why long-term investors shouldn’t react to these types of short-term events.
“We’ve found over and over again that those knee-jerk reactions can lead to mistakes.”
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