This stock market correction was a long time coming.
The Dow Jones industrial average’s meteoric rise was completely unsustainable and pretty much every analyst knew it. It was amazing when the Dow took only 23 days in January to move from 24,000 to 25,000 for the first time — and then it was only a week later when the Dow soared last month to 26,000.
[See: 7 of the Best Stocks to Buy for 2018.]
There was so much skepticism baked into this outrageous growth that it didn’t take much to pop the bubble. Rising bond yields, a surprisingly strong jobs report that showed the best wage growth since 2009 and fears that the Federal Reserve would be forced to raise interest rates more quickly than expected was all it took to send markets down 1,175 points on Monday, and more than 2,200 points in the last week. Markets were set on Tuesday to open more than 500 points lower, continuing the rout and putting the market in correction territory.
“Higher [bond] rates are typically bad for stocks,” says Brad McMillan, chief investment officer for Commonwealth Financial Network. “As investors worried about that, perhaps they also thought about political risks, geopolitical risks and even corporate risks. All of these concerns, which have been largely ignored, probably affected the pullback.”
That’s more than $1 trillion in wealth lost out of IRAs, 401(k)s and retirement savings. A painful blow, to be sure, but not entirely unexpected.
In fact, stock market corrections — the Wall Street term for when the stock market loses 10 percent of its value — aren’t that uncommon. The market has seen 37 pullbacks of at least 10 percent since World War II. Investment firm Deutsche Bank says investors can expect the stock market to see a correction about once a year. They’re just not usually as dramatic or swift as the market’s fall over the last week.
The most important thing for investors is not that we’re having a stock market correction, but what they’re going to do about it.
Many experts recommend staying the course.
[Read: 9 ETFs That Go Up When the Market Goes Down]
“[Monday’s] market drop, while understandably unsettling to investors, just takes us back about two months. The S&P 500 closed last closed lower than this on Dec. 7,” says Greg McBride, chief financial analyst at Bankrate.com. “Market corrections are normal, no matter how nerve-wracking they are at the time. Just hang in there, maintain a long-term perspective and resist the urge for any knee-jerk reactions.”
In a written commentary, McMillan says the stock market is likely to bounce back.
“Sudden crises of confidence, like the one we are seeing, can knock markets down. But they then tend to bounce back. This is exactly what we saw in early 2016, which is probably the best comparison to today,” he says.
“The reason is that, if economic fundamentals are sound, as they were in 2016 and are today, there is no real reason for confidence to decline,” McMillian says. “Sudden declines happen. Then, as investors consider matters more thoughtfully, they buy back in. We may well see further declines … but the bigger picture remains positive.”
McBride says markets are falling because they’ve become accustomed to low interest rates and central banks putting money into the financial system. Now that global economies are improved, stimulus money is drying up and interest rates are going up — a result that should be expected and welcomed.
“Let’s look at the big picture — the economy is improving, more people are working, they’re seeing more money in their paychecks, and tax reform will boost the bottom line of businesses and households,” McBride says. “If the market is falling, that means it’s now on sale.”
[See: 7 ETFs to Buy as Interest Rates Rise.]
The bottom line. While recent days can be nerve-wracking for inexperienced investors, the stock market is still on track for growth in 2018. Stock market corrections aren’t unusual, and are in fact a result of a healthy economy.
A stock market correction doesn’t mean that the wonderful bull run in the U.S. stock market is at an end. But it is a dose of reality for an overbaked market that rose too high, too fast since December.
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We’re In a Stock Market Correction. What’s Next? originally appeared on usnews.com
