Stocks Plunge – What Happens Next?
It’s been a rough couple of weeks for stocks. After about two years of dormancy, volatility is back in the markets with the S&P 500 crossing into correction territory (-10%) for the first time since early 2016. The question on many investor’s minds is, what happens from here?
History suggests a few outcomes may be possible.
According to Goldman Sachs Chief Global Equity Strategist, Peter Oppenheimer, the average bull market 'correction' is about 13% over four months, with about a four-month period needed for stocks to recoup the lost value. At this rate, that could technically mean getting back to even from current losses by this fall! Not an ideal outcome, but remember that averages and history are just meant to provide insights – not forecasts.
Another statistic Mr. Oppenheimer mentions is that if the S&P 500 crosses the 20% mark, which would technically put it into bear market territory, then the ‘pain’ lasts for 22 months on average, with a much longer recovery time before getting back to even.
Most big players in finance such as Goldman Sachs, JP Morgan, Credit Suisse, Bank of America, and others are forecasting a positive year for stocks in 2018, so the bear market outcome appears remote according to their forecasts. Most of the economic data and fundamentals they cite for a positive year remain intact, which gives the impression that what is occurring today in the market is a stock market correction, not a bear.
So, if this is a stock market correction and not a bear, what should investors do next? Famed mutual-fund manager Peter Lynch has perhaps the best advice, when he said that “far more money has been lost by investors preparing for corrections, or trying to anticipate corrections, than has been lost in corrections themselves.” In other words, if the investor believes this to be a correction, which means it’s a short-term dip in prices, perhaps the best approach would be to see it as a new opportunity to invest in areas that look attractive. Or, do nothing at all.
