Buzz
The S&P 500 entered correction territory at yesterday's close, falling slightly over 10% from its peak on January 26, although stocks have been rising today.
As noted by The New York Times, a correction doesn’t necessarily signal impending disaster: Over the past two decades, there have been 10 corrections, two of which preceded bear markets—a sustained 20% drop—during the years 2000 and 2008.
It’s almost impossible to pinpoint the exact causes of last week’s market drop. However, the most plausible explanation seems to be concerns that central banks may raise interest rates to combat inflation and prevent overheating in fast-growing economies. Those concerns intensified on Thursday when the Bank of England indicated that it might increase rates more quickly than expected.
For a comprehensive overview of market trends since 2008, check out this report from Yardeni Research:
Yesterday's decline may seem significant, especially considering it's been two years since the S&P entered correction territory (as shown in the graph above), and 2017 was an exceptionally strong year for growth. However, the events of this week were not unforeseen: Experts have been anticipating a bear market for some time, given that the current bull market is the second-longest in history. According to Peter Oppenheimer, Chief Global Equity Strategist at Goldman Sachs, it typically takes about four months to recover from a correction and around two years to bounce back from a bear market slump.
As I mentioned earlier, during uncertain times like these, it's crucial to stick to your long-term financial plan. The recent declines might just be a small blip when compared to the strong growth we've seen in recent years. But if you're feeling uneasy, it could be a good moment to reassess your risk tolerance. While no one suggests selling off stocks during a dip, as Ron Lieber discusses in The New York Times, '[y]ou may have to work more or work longer or take on a side hustle to meet your goals. If that doesn’t bother you, lower your stock holdings accordingly.' Just make sure you're informed about the potential missed opportunities in gains.
