Just Because the Stock Market Panics Doesn’t Mean Investors Should, Too

If recent stock market jitters have you feeling a little stressed, you’re not alone. After regaining some of its losses at the tail end of 2022, the S&P 500 is now sliding down toward October’s low. Hawkish monetary policy, a shaky housing market, mounting consumer debt, saber-rattling over the debt ceiling, and more have the stock market in a state of perpetual stress. You can almost see its metaphorical eye twitching.

Click to Enlarge. Data: Yahoo! Finance 

And then there’s the dreaded “r” word: recession. This sort of stock market trajectory inevitably spurs a call-and-response chorus of bear and bull voices offering conjecture dressed up as prognostication. The furor generates quotable moments but little clarity.

While your average consumer or investor might not be able to explain the complex web connecting various data points, they do understand the meaning of a recession. They’ve lived it. And this time around, their fears seem to be aligning with expert perspectives. The New York Federal Reserve’s Recession Probability Model, which measures the likelihood of a recession within the next 12 months, has now hit its highest level in decades.

This type of consensus can spur a run for the metaphorical exit, even if that sprint is ill-advised. One way to avoid fearfully motivated decisions is to parse the recent movements through a historical framework.

Putting Headlines About Stock Market Movements in their Place

For better or worse, many Americans gauge the state of the economy based on stock market movements. News outlets and commentators, whether deliberately or inadvertently, add fuel to the fire with headlines that cater to these assumptions. Stock market point jumps and drops get discussed like they’re the equivalent of a reading on a thermometer. 

If you’re paying attention to those readings, you’re probably a little anxious about where things stand. Indeed, if you look back over the past 50 years, every single one of the biggest single-day point drops in the S&P 500 have taken place in the last three years.

Click to Enlarge. Data: Yahoo! Finance 

Ugly, right? Looking at this chart, you might be tempted to draw certain conclusions. Based on single-day point drops, it would appear that the COVID-19 recession represented the most profound economic shockwaves. The number of days in 2022 where the S&P 500 dropped by a significant amount of points might indicate that we’re moving towards a similar type of turbulence… right? 

Data on Point Drops in Stocks isn’t Enough

Not so fast. These numbers might make for powerful soundbites, but they fail to provide adequate context. When looking at single-day percent drops during the same time period, the picture shifts.

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Click to Enlarge. Data: Yahoo! Finance 

There are a couple things worth noting here. First, in the past 50 years, only three of the top ten single-day point and percentage drops in the S&P 500 coincide, right at the top of the COVID-19 pandemic. Arguably, the motivators behind this time period were outliers in the broader sphere of economic events. Otherwise, the biggest downward percentage swings in history don’t line up with the biggest point drop.

There’s a reason for that. The S&P 500 on October 19th, 1987 opened at 282.7 and lost just shy of 58 points by day’s end. On March 16, 2020, it opened at 2508.59. and closed and lost almost 325 points. Maybe 58 points seems like nothing compared to 325 points, but relative to where those days started, the impact is very different. 

Comparing Point and Percent Stock Market Drops

The contextual size of stock market drops, represented by percentage changes, is a much more valuable metric for investors. This becomes clear when you look at what each of these record days would have done to you in terms of dollars. 

For the sake of argument, let’s assume you invest $10,000 into the S&P 500 directly at the market’s open on the date of these single-day record percentage and point shifts. The following chart details how much you would have lost in dollars by the close of each of those days. 

Click to Enlarge

This visualization shows us the depth of the financial damage rendered by percentage and point swings downward. While the massive point drops since 2020 made for excellent headlines, that narrative does not align with the actual impact of those broken records. 

How an Investor Mentality Mitigates Stock Market Losses  

So, what do you do when the fear of a major stock market correction looms? Experts tell you to look at long-term performance, and so does the data. Financial Poise has written on this subject before, but it bears repeating: history tells us that making a long-term investment instead of a short-term trade provides a significant rate of return.

Click to Enlarge.

Doug Kass, professor of finance at the University of Maryland, reminds us that this isn’t unique to the S&P 500. As he pointed out in August of 2019:

The Dow Jones Industrial Average, if one goes back to its inception in 1896 and up to the present, has earned 5.6 percent per year on the capital gains of the stocks. So, despite stock market volatility, historically, the stock market has still done better than most other investments.

To this end, investors probably never needed to worry about point or percent swings on a day-by-day basis to begin with. If anything, a down market might allow you to buy shares at a discount, providing greater upside opportunities. Selling in a downturn, on the other hand, is arguably the one sure way to lock in a loss.

Keep Calm and Carry On Amidst Stock Market Volatility

Keep all of this in mind the next time the stock market headlines have you nervous.Don’t panic. Stay calm and level-headed. Remember that you invested for the long haul – not just today, this week, or this month. Let the fluctuations run their course for now. If you are in distress, call your financial advisor.

They can remind you of your long-term goals and review your entire portfolio strategy with you. If you are still alarmed, you can discuss strategies to minimize the stress of stock market volatility and inevitable oscillation, and perhaps adjust your allocations to less volatile sectors, such as bonds or savings accounts and CDs. Diversification is always a sound strategy for mitigating risk in a topsy-turvy market. 

Weathering the storm is something investors are used to. The stock market’s temper tantrums are nothing they cannot handle. Remember the context of the market drops. Understand why the movements are notable, but not the defining moment of the year, and move forward in a calm manner. Be the stalwart investor you know you are, and keep communication channels open with your financial advisor.

Disclosure

The information provided in this report should not be considered a recommendation to purchase or sell any particular security. There is no assurance that any securities discussed herein will remain in an account’s portfolio at the time you receive this report or that securities sold have not been repurchased. Past performance is no guarantee of future results. The reader should not assume that investments in the securities identified were or will be profitable.

The S&P 500 Index is a free-float market capitalization-weighted index of 500 of the largest U.S. companies. The Dow Jones Industrial Average, or DJIA, is a price-weighted index that measures the performance of 30 large publicly-owned companies in the U.S. One cannot invest directly in an index, and index returns do not reflect the deduction of advisory fees, brokerage or other commissions, and any other expenses a client would have paid, and that these expenses would negatively impact performance.

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This is an updated version of an article opublished in August 2019. ©2023. DailyDACTM, LLC d/b/a/ Financial PoiseTM. In addition to the above disclosure, this article is subject to the disclaimers found here.