If you invest at all, you've probably noticed that your portfolio is significantly smaller than it was at the start of the year. Year to date, the S&P 500 was down by about 9% at the close of trading Tuesday -- and many growth stocks were down by much more than that. Consider a stock like Block (SQ 5.04%): It's off by more than 30% year to date, and has lost more than 55% since Nov. 1.
On Monday, the market went on a particularly wild ride: The Dow Jones Industrial Average plummeted more than 1,000 points during the session, only to recover and finish the day slightly up. But then the market was down again in early trading on Tuesday. Some major indexes dipped into correction territory -- defined as a decline of 10% or more -- as the Nasdaq Composite is down about 13% year-to-date. The S&P 500 was down about 9% year to date as of Tuesday morning, and the Dow was down about 6%.
Given all this volatility, investors may be wondering what to do with their portfolios. Is this a good time to be buying? Or should you be selling?
Image source: Getty Images.
Why the dip?
On Monday and Tuesday, the market dropped due in part to the rising threat that Russia may invade Ukraine, as well as due to investors' concerns about interest rate hikes. The Federal Reserve Board has already indicated that multiple hikes to the benchmark fed funds rate are coming in 2022 to help curb inflation. But concerns on Wall Street were heightened this week in part due to the Fed's scheduled meeting Wednesday to discuss plans for interest rate hikes in March and beyond, among other fiscal policy shifts.
Aside from macroeconomic and geopolitical issues, the ongoing sell-off -- the origins of which stretch back to the fall of 2021 -- is mostly hitting the technology sector and growth stocks that saw their valuations skyrocket to unsustainable levels over the year that followed the early 2020 market crash.
In 2022, economists predict higher than average economic growth, but not as strong as it was in 2021. Gross domestic product is expected to grow by 4% to 4.5%, according to analysts. The stock market, meanwhile, is expected to rise, though by slightly less than in an average year, according to market watchers.
In sum, these predictions indicate that the current downtrend won't last too long, and that the market will bounce back this year.
Historically, sharp market drops have often been followed by larger -- and longer -- upturns. Look at the pandemic-triggered bear market of February and March 2020, when the S&P 500 lost 33% of its value. By Aug. 17, 2020, the market had gained back all its losses, as the S&P 500 closed back over 3,380. A year and a half later -- even in the midst of this latest swoon -- the S&P 500 is still sitting at around 4,400 -- about 30% higher than it was on Aug. 17, 2020.
If you sell stocks that have slumped, you just lock in the results of those declines. If you hold on, you give the market, and those specific stocks, a chance to bounce back. And broadly speaking, the market typically does.
Now, Wall Street is not in a bear market today. That's defined as a drop of 20% or more from its peak. But even if this slide continues and reaches that painful milestone, consider this: The average U.S. bear market has lasted for about 9.5 months, while the average bull market has persisted for more than 2.5 years. Also, stock indexes lose about 36% on average during bear markets, but gain 114% on average in bull markets.
Should you be buying?
If you believe in a company and its fundamentals, there's no reason to sell its stock, unless something major happens in its industry or within the company that alters its trajectory. But should you be buying stocks right now or adding to your positions, given the current uncertainty?
The answer to that question is an emphatic yes, with the caveat that you should not change anything about your approach or strategy. This is a particularly good time to buy because previously inflated valuations and share prices have come back down to a more normal range for a lot of growth stocks and technology stocks. Many good companies, including leaders in their industries, have suffered significant declines, but the competitive advantages that made them winners remain, and those will propel them out of this period of volatility, and help them get back to delivering long-term gains to their shareholders.
More speculative plays, however, should be viewed with caution. If a stock was up 200% last year without earnings or revenue gains -- perhaps because it was riding a wave of investor sentiment or a general interest in a particular industry -- then that stock may not be the best option to buy now.
Two things should remain constant, no matter the market environment -- invest for the long term, and do your research.
