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Global stock markets opened sharply lower on Friday morning. U.S. stocks are now officially in a correction – meaning a 10% decline from their recent high.
Back in August, stocks briefly entered correction territory before rebounding. The 2016 stock market correction marks the second correction in just five months.
That may seem surprising. But it’s worth remembering that stock market corrections are completely natural. Back on Aug. 28, I wrote to Daily Profit readers:
Between 1900 and 2014, a stock market correction happened once per year (on average). Until this week, it had been nearly four years since the last correction occurred in October 2011.
Just like the August correction, this one happened in a matter of days. Even more surprising is the quick succession of the back-to-back corrections in August and now again in January.
There have only been three quick back-to-back corrections in the last 100 years. Here are some comments from Art Cashin, a legendary NYSE floor trader:
Jason Goepfert, the outstanding pilot of SentimenTrader dug into his incredibly extensive files to uncover a rather rare condition. He noted that the indices have had two 10% corrections in a rather short span. That has only happened three times in the last 100 years. Unfortunately, those occurrences were in 1929, 2000 and 2008. As you may recall, those were not particularly good years for the bulls.
Even if you’re not a stock market historian, you probably know that 1929, 2000 and 2008 were horrible years for stocks. And for that reason, these successive corrections appear concerning.
The sharp drop for stocks is clearly spooking investors. Last week, I got a call from my mother-in-law. She’s retired, and called to ask me if she should cash out of her 401(k) retirement account. The reason? She’d been hearing on television that there was going to be a huge stock market crash.
My advice to her was simple. In fact, I’ll simply show you the personal email that I sent last week:
The fact is that nobody – not the people on CNBC, not Warren Buffett, and not me – can accurately and consistently forecast the short or intermediate direction of the stock market or security prices.
Many people rush to make sudden moves when the market is volatile – especially after days like yesterday. Of course, commentators take to radio and TV to share their best guesses about what’s ahead. After all – that’s good press, and a good way to “market” themselves. But it’s important to remember that good TV isn’t about being right or wrong. It’s about ratings, and getting people to listen. It’s all about the attention-grabbing headlines and statements.
If you truly want no risk of capital loss, then you should probably own a money market or CDs. However, if you make that decision, you’ll have to accept that you’ll make no profits nor earn any income from your savings. That’s the trade-off – risk vs. income/profits.
Even if stocks and bonds crash in 2016, it doesn’t matter for this retirement account. You don’t plan to liquidate the account in 12 or 24 months to pay for a new house, send your kids to college or go on a European vacation. The fact is, after a bear market or crash, prices typically recover within several years (the last bear market is a good case study). So even if prices crash, over a longer time horizon, the account would recover from any temporary losses.
It’s important to stay on track and stick to your investment plan, especially when stocks are volatile. I know it looks compelling to throw in the towel and sell your stocks when the market is down.
But it’s important to remember that you can’t time the market. You don’t know where stocks are heading in the short term. And hitting the panic button is typically the worst thing you can do.
Stocks are the best long-term investment. If you’ve been invested in stocks for the last few years, you’ve likely made some pretty decent gains. For example, in the last five years, the S&P 500 has gained 46% – even after factoring in this latest correction.
The recent stock market sell-off appears to be disconnected from the reality of the U.S. economy. The U.S. economy continues to be healthy, with 5% unemployment and 2% estimated gross domestic product growth for 2016. While that growth isn’t robust, it’s decent compared with the rest of the world.
Now is obviously a good time to re-evaluate your portfolio, and be certain that you’re happy with all of your investments. Investors with cash on the sidelines should be on the lookout for buying opportunities in the coming weeks and months.
During times of volatility, it’s often good to check out the wise advice of Warren Buffett. Click here to claim your free copy of his No. 1 book.