Monday was one of the roughest days for stocks in months. The Dow Jones Industrial Average sank 2.1%, the most the benchmark has lost in a single day this year. Other major indexes weren't far behind: The S&P 500 fell 1.6%, and the Nasdaq Composite surrendered 1.1%.
If you're seeing those nasty red numbers in your portfolio, especially amid a stellar earnings season, you may be wondering what gives. More importantly, you're likely wondering what, if anything, you should do about it. The answer may seem counterintuitive.
"The stock market is the only place where things go on sale and people run out of the store screaming," says Ryan Detrick, chief market strategist at LPL Financial. "Use weakness as a buying opportunity."
Below, financial experts provide explanations, perspective, and strategies for investors looking to make sense of a rough day in the market.
Market-watchers have cited several explanations for Monday's drop. One is that investors are worried that a rebound in Covid cases could put a damper on economic growth. "Clearly there are some jitters about the delta variant," says Cliff Hodge, chief investment officer at Cornerstone Wealth Group. "Trends are getting worse at the headline level, and even with all of these red numbers, some stay-at-home stocks appear to be cashing in."
Another potential trigger: long-term interest rates. The rate on the 10-year Treasury fell to its lowest level in five months on Monday, reflecting concern among bond investors about slowing economic growth. The mechanics behind this move are a little tricky. Bond investors tend to pile into long-term bonds when they believe the economy will weaken, in the hopes of locking in higher rates. In so doing, they drive up the price of the bonds, which in turn, drives down yields, since bond prices and yields move in opposite directions.
In short, "the bond market is telling the stock market there could be bigger problems under the surface," says Detrick.
Video by Helen Zhao
Ultimately, though, the pullback may have just been a long time coming for an overly enthusiastic stock market, says Sam Stovall, chief investment strategist at CFRA.
"Is it really all that stuff, or is it because we're in the peak earnings quarter and we're realizing we're going to be on the leeward side of the mountain?" he says. "It was just a matter of time. We've gone more than 290 days without a decline of 5% or more. The average time between such declines is 178 days."
Even if markets were overdue for a pullback, precipitous declines in stock prices can be scary for investors, as they could presage further drops. And that's very possible, says Stovall. "I think we're vulnerable to a 10% to 15% decline in stock prices," he says.
Investors would be wise to put Monday's market slide, and the potential for greater damage, in near- and long-term perspective, though, he adds.
Over the short term, says Detrick, the market still has a lot going for it: "We still have explosive earnings and an accommodative Federal Reserve, and the market still isn't very far from all-time highs. After a 90% rally in the stock market, let's not panic about a 3% to 4% pullback. In fact, a 10% correction after a 90% rally isn't the end of the world."
What's more, even if you fear that greater declines are coming, history indicates that it wouldn't be long before things would again be back on track, says Stovall. "There have been 60 5% to 10% declines since World War II, and on average, it's only taken us one and a half months to get back to break even," he says. "It only took us an average of four months to fully recover from declines of 10% to 20%."
With those numbers in mind, you wouldn't be wrong to wait out declines in the market or ignore your portfolio altogether when things are headed south. But if you want to be proactive, experts say there are a few strategies worth employing.
One is making sure that your portfolio is well diversified and invested in line with your tolerance for risk. "It's days like this when it's really important to have a diversified portfolio," says Detrick. "Stocks are down, but bonds are having a terrific day."
Video by Helen Zhao
If the thought of a big decline in your stock portfolio would keep you tossing and turning at night, or tempt you to prematurely sell your long-term investments, it may be time to beef up more conservative parts of your portfolio, such as your allocation to bonds.
For younger investors with plenty of time to withstand short-term swings in stock prices, pullbacks represent a chance to add to your stock portfolio on the cheap. But you needn't wait until stocks go on clearance, says Hodge. "Go slow. You don't have to try to nail the bottom," he says. If you have some cash on hand, consider gradually and methodically adding money to your positions to avoid piling in before a big market slide or waiting too long and missing your window to buy stocks at a discount.
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