By Lindsey Simek
Over the last few weeks, we have been hearing buzz about a possible market correction. The terms “downturn” and “pullback” seem to be everywhere and that is causing some uneasiness. We like seeing our portfolios grow, our money working for us, and over the past 18 or so months, we have grown accustomed to seeing consistent gains from our investments. We observed an unbelievable recovery, with minimal pullbacks from the early stage of COVID 19, in Spring of 2020.
At that point in time the S&P 500 index, a benchmark of large-cap U.S. stocks, had declined more than 33% in about a month. However, since then we have witnessed an unbelievable recovery, and by August of 2021, the S&P 500 doubled in value. While this is certainly not a bad thing, it has led to speculation that a market correction is overdue.
Historically, the market has had corrections and declines as part of the normal investment cycle. According to Capital Group, a 5% decline happens about three times per year and a 10% decline will occur about once a year. Then about once every three and half years we will experience a 15% decline in the market and then 20% every six years. It is important to understand that nobody can reliably predict when a decline will happen, how long it will last, and timing the market (when to get in or out) and is nearly impossible (What Past Stock Market Declines Can Teach US).
The market correcting itself is a natural occurrence and as I mentioned above, historically, downturns are inevitable. However, there are other factors that will contribute to a market pullback. A reason for a pullback, is since we have seen a steady increase since March of 2020, the market literally needs to take a breather (Constable, Simon). Also interest rates have risen lately which means companies that are heavily leveraged, such as many high-tech companies, have been on decline. The markets hate uncertainty and COVID is still an ongoing issue that we just can’t seem to shake. The Delta Variant is looming over our heads and still causing anxiety within the market. If all that isn’t enough, now we have the government debt ceiling deadline approaching. “If the country doesn’t increase its debt limit, it’s like maxing out a credit card: The bill-paying activity stops, and the government defaults on the financial commitments it has made” (Rowan, Lisa). A default by the U.S Government would certainly cause turmoil within the stock market and investment mostly likely would be affected.
This is not a time to panic, not at all. At this point the market has seen just shy of a 5% decline as of this writing and we are experiencing some volatility. It’s not unexpected, but still no fun at all.
While we are always trying to mitigate losses, we must keep in mind that a 5% decline is normal and not detrimental to long term financial goals. According to Forbes, investors with a long-term time horizon may decide to ignore the pull back completely. This is based on the notion that the major stock indexes tend to trend higher over long periods of time (Constable, Simon). At this point, the best advice for investors may be to just sit tight.
However, this is why you hired us as your financial advisors. At Capstone, we build our own portfolios, and we make changes to such on risk and opportunity we see in the economy and market. We are here at any time to talk through your portfolio, your risk level and market volatility.