The Market Volatility Monster is Back!
Markets entered correction territory last month. But whatever you call this short-term move, we think the best course of action for long-term investors is: stay calm and exercise patience.
If you had better things to do the past few weeks than watch the stock market’s every tick—and we hope you did—you might think the month’s -5.26% drop signaled something worse to come. The S&P 500 slid for most of the month, even entering correction territory. (A correction is a short, sharp drop of -10% to -20%). Regardless, we think investors’ best course of action is the same: Stay calm and exercise patience.
Magnitude aside, the downdraft to start 2022 looks a lot like a correction—and not much like a bear market. The lockdown-induced, warp-speed 2020 version aside, bear markets usually begin gradually—with long rolling tops early. As the old adage goes, bear markets typically “start with a whimper, not a bang.” They usually begin amid euphoria, with investors generally poking fun at bearish theories. And they are driven by fundamental negatives—real doozies investors either don’t see or dismiss as phony, teeing up major downside surprise when reality dawns on them.
Corrections are different. They normally begin with a bang, for any or even no reason, with stocks falling steeply from a prior high and plunging fast. Typically, they have some big fear or scare story associated with them many presume is driving the negativity. After a swift fall that has most expecting worse to come, stocks turn around and snap back higher—usually about as fast as they fell—with no warning.
All this to say for the long-term investor, no matter the market movement that happens this month or the next few, staying the course of a predetermined strategy or plan is probably best.