A month ago, investors were jittery over sticky inflation, a weakening labor market, and the risk from AI, both that it could disrupt enterprise software companies and trigger a bubble in infrastructure spending.
Then, the U.S. and Israel attacked Iran, sending oil prices skyrocketing as Iran closed the Strait of Hormuz, and injecting a new degree of uncertainty into the global economy.
In response, the Dow Jones Industrial Average (^DJI +1.39%) and Nasdaq Composite (^IXIC +1.87%) have fallen into a correction, defined as a decline of 10% or more from a recent closing high, and the S&P 500 is down nearly 9%.
Not only have oil prices spiked from the conflict, but fertilizer prices have also risen, which is likely to send food prices higher. In other words, if the conflict is sustained, it could cause a global recession.
Not surprisingly, investor sentiment has soured with extreme fear driving the market, according to the CNN Fear & Greed Index. The American Association of Individual Investors (AAII) found that 50% of respondents were bearish on the market over the next six months, while just 32% were bullish.
Image source: Getty Images.
The silver lining for investors
Yes, markets are down, and it's painful to lose money in your portfolio, even if it's not money you were planning to use anytime soon.
However, investors need to be aware that these kinds of fluctuations are a normal part of the market cycle. Corrections happen more often than you might think, occurring every one to two years, and stocks typically recover quickly, returning to previous highs in the next eight months, though that calculus changes in a bear market, or when stocks fall at least 20% from previous highs.
Most importantly, in every previous stock market decline, stocks have eventually recovered and gone on to record all-time highs.
Investor sentiment is down, but it isn't even at its lowest point in the last year. According to the AAII, that came last April during the week of President Trump's "Liberation Day" tariffs when 62% of investors were bearish on the next six months. That forecast turned out to be woefully wrong as Trump paused those tariffs and stocks soared, climbing through this February until the war started.
That doesn't mean that stocks will soar again over the next six months. After all, no one knows when are how the war will end or when the Strait of Hormuz will be reopened, but the post-Liberation-Day surge is a reminder that stocks can recover much faster than investors think.
On that note, corrections are a good time to consider buying high-quality stocks at a discount. While we don't know when the market will recover, investors should feel confident that eventually the major indexes will go on to set new all-time highs.
