This Content Is Only For Paid Member
If you’ve been nervously checking your 401(k) in the wake of the recent stock market turmoil, you’re not alone.
The S&P 500 concluded the last week with a more than 10% decline from its recent high in July, placing the stock index into correction territory. This development is causing concern for millions of Americans who have investments in mutual funds that track this benchmark, reflecting its performance.
The S&P 500, which comprises 500 leading publicly traded U.S. companies, closed at 4,117.37 on Friday, marking a 10.3% drop from its peak on July 31. The tech-heavy Nasdaq Composite index, which had already entered correction territory earlier in the week, closed at 12,643.01.
While the recent downturn in the S&P 500 might be unsettling for 401(k) holders, experts in the market emphasize that corrections are often short-lived.
“Although the last three months haven’t been fun for investors, it is important to remember that corrections are normal and they happen quite often,” says Ryan Detrick, Chief Market Strategist at Carson Group, a financial services firm.
Understanding Correction Territory:
Corrections happen when a market experiences a drop of at least 10% from its most recent peak. This suggests that investors have concerns about the future performance of stocks.
A correction is more severe than a pullback, which is typically a short-lived decline of less than 10%, but it doesn’t reach the level of a bear market, defined by a drop of 20% or more, which can lead to significant losses for investors.
On average, corrections occur every few years, including during the bull market from 2009 to 2020.
The Reasons Behind the Stock Market’s Decline:
The recent market decline comes as rising Treasury yields are making bonds more attractive to investors. As the 10-year bond’s yield surpassed 5% for the first time since 2007, some investors are shifting away from stocks. This shift is also influenced by various economic and geopolitical concerns, such as escalating tensions in the Middle East.
Ryan Detrick pointed out that, between January and July, the S&P 500 delivered its best performance for the first seven months of a year since 1997. Hence, a period of “give back” was not entirely unexpected.
Implications for Your 401(k):
According to Sam Stovall, Chief Investment Strategist at CFRA Research, investors should consider the typical recovery pace of the market. He notes that pullbacks typically take about a month and a half to return to breakeven, corrections require approximately four months, and bear markets (with a drop of 20% to 40%) usually take around 13 months.
As for Dow futures, they indicate a potential turnaround, though it’s not a guaranteed recovery. U.S. futures showed gains ahead of a week packed with significant economic events, including the Federal Reserve’s rate decision, a jobs market report, and Apple’s quarterly earnings. Dow futures saw a 0.1% increase, while futures tied to the S&P 500 index gained 0.24%, and Nasdaq futures climbed 0.4%.
“The phrase that they should keep in mind is, ‘This too shall pass,'” says Sam Stovall. “If an investor does not have 13 months, they probably should not own stocks.”
For investors looking to take action while the stock market is down, Sam Stovall recommends considering the following strategies:
- Rebalancing their portfolio.
- Purchasing high-quality stocks that have declined in price along with the market.
- Tax loss harvesting, which involves selling underperforming stocks and using the losses to offset capital gains from other investments.
However, he also offers a word of caution, suggesting, “Sit on your hands. Because the last thing you want to do is make an emotional decision. You want to make sure that you stop your emotions from becoming your portfolio’s worst enemy.”
