Election uncertainty, trade wars and rising interest rates made for a recipe of investor concerns and panic in October.
After falling for 21 out of 27 sessions, the S&P dropped 9.9% or about 290 points to a low on October 29th. The Dow Jones Industrial Average (Dow) fell 2,385 points or 8.9% from its high. Losses in the Nasdaq Composite (-13%) and the small-cap Russell 2000 Index (-15%) have been steeper.
Investors should consider this a fire drill.
What if the stock market correction continued and was something like the 2011 correction (about -17%) or the 2015-2016 correction (-14.5%)?
According to Ned Davis Research, the Dow shows an average short-term bear market loss of -26% in the chart below, which ranges back to 1901. When stocks have been in a long-term uptrend, like they have been since March 2009, the average short-term bear market has fared slightly better, showing a loss of -19%.
With the world interconnected, global stocks led the U.S. slide by eight months. Some international stock markets are down 20% or more, which is considered bear market territory. If you have a well-diversified portfolio, you may have some losses that are causing your overall portfolio to have declined more than the U.S. indices quoted above.
Typically, the stock market notches its strongest gains following U.S. midterm elections. In fact, the fourth quarter of a midterm election year is the strongest (+7.5%) of all 16 quarters in a presidential cycle.
Therefore, it is a solid time to run a personal fire drill. If this recent market action has you awake at night, there are probably two culprits – One, you have not planned accordingly for cash needs over the next year and panic set in as you looked at having to sell during this correction and/or two, you have too much equity for your REAL risk tolerance. If that’s the case, it would be prudent to review your portfolio stock weightings.
Keep looking forward,
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