It’s official. As of Tuesday’s close the Dow Jones Industrial Average (DJINDICES: ^DJI) was down 10% from its early January peak, qualifying the pullback as a full-blown correction.
The move is, of course, prompting the usual questions. There’s only one overarching question, though. That is, is the sell-off over, or is there more downside left to dish out? More to the point, investors want to know if they’ll regret stepping in at this point of the dip.
While the question is simple, the answer is not. Indeed, the only good answer to the question begins with another question. That question is: What’s your timeframe? If you pin that down first, the second part of the answer is much easier to figure out.
As you might have already figured out, yes, this is your friendly reminder to not worry too much about what happens in the short run, and instead remain focused on the bigger, long-term picture. However, there are some interesting numbers to support the sermon.
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Don’t beat yourself up if you find yourself keeping constant tabs on the market these days. This is the first time since early 2020 that stocks have suffered such a setback, prompting unfamiliar worries. And, aside from the seemingly unyielding selling, the turmoil in Ukraine feels like it could readily spread outside of the beleaguered country’s borders. Much of the financial media industry also appears to have lost perspective, focusing on the short-term effect of new developments while losing sight of the global economy’s long-term undertows.
In other words, daily hysteria has become the norm. Most of it has leaned in a bearish direction.
Here’s how to get a handle on… well, everything: Ask yourself if any of today’s riveting news will matter five years from now. In most cases, the answer is no.
That’s not to suggest investors should be dismissive of any and all headlines. Some of them certainly matter for the long haul. Take the Federal Reserve’s expectation that eight (or more) quarter-point increases of the Fed Funds Rate are likely before the end of 2024. That’s certainly going to change intramarket dynamics, working in favor of value stocks, and against growth stocks. Conversely, Walt Disney‘s recent decision to roll out an ad-supported version of Disney+ later this year is interesting, but hardly game-changing for the company’s top or bottom lines. Nevertheless, the headline’s caused a pretty big stir.
Go for it, as the odds are in your favor
The question remains, however: Is it safe to step into stocks like the blue-chips that make up the Dow Jones Industrial Average right now?
If you’re truly a long-term investor, yes, it’s fine.
Don’t misread the message. Stocks may well move even lower than they already have. It’s statistically unlikely, however, that stocks will be lower a year from now than they are at this point in time.
LPL Financial’s Ryan Detrick serves up some numbers-based perspective on the matter, tweeting data in late January indicating that 90% of the corrections the S&P 500 (SNPINDEX: ^GSPC) has suffered since 1980 have been completely undone a year later — and by more than a little. The average gain from those pullbacks’ lows was a healthy 25%. Two years later, even more gains are likely.
Online brokerage firm Charles Schwab crunched some different numbers and came to a very similar conclusion. That is, since 1974 the S&P 500’s pullbacks bounced an average of 8% within a month of that dip’s ultimate lows being made, with the index being higher to the tune of 24% a year following the exact bottom.
But is this time different? Maybe it is. But it probably isn’t, even if things continue to worsen. Of the 24 completed market corrections the S&P 500 has experienced since 1974, only five have gone on to evolve into true bear markets.
Simply put, the odds are in your favor.
And don’t even think about trying to time any new entries
There’s a catch. That is, you don’t know when or where the Dow or S&P 500 are going to hit bottom. It could be today, or next week, or next month. In that you don’t know where the pivot is going to take shape, you have to stick with your holdings — or be willing to step into new ones — even if it’s uncomfortable to do so. And, on the off chance the market’s current weakness is the beginning of a bear market, you still have to be willing to keep holding or start buying anyway.
Most investors innately know this stuff, of course. If you needed an unbiased reminder that investing really is all about the bigger picture, though, you just got it. Don’t sweat the recent lull.
By the way (and as I explained just a few days ago), if there’s any sliver of the market that’s better primed to rebound, it’s the blue-chips found within the Dow Jones Industrial Average. Most of these tickers were indiscriminately dumped when investors panicked a couple of months back. Now these stalwarts are apt to be highly sought due to their predictability and reliability in an uncertain environment.
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Charles Schwab is an advertising partner of The Ascent, a Motley Fool company. James Brumley has no position in any of the stocks mentioned. The Motley Fool owns and recommends Walt Disney. The Motley Fool recommends Charles Schwab and recommends the following options: long January 2024 $145 calls on Walt Disney and short January 2024 $155 calls on Walt Disney. The Motley Fool has a disclosure policy.