Amid the market turmoil that has suddenly reared up, investors have a lot of questions. One of the questions the Yahoo Finance audience recently put to us: When was the last time the stock market behaved like this?
The answer: Not long ago at all. Just two years ago, in February 2016, stocks bottomed out around 14% lower than the peak reached in May of 2015. In fact, the correction that began in May 2015 lasted more than a year before stocks regained new highs in July 2016.
In the current correction, stocks are down a little more than 10% from the peak reached on Jan. 26. The current selloff has happened quickly, especially given the lack of an obvious triggering event. What seems to be happening is an abrupt reassessment of certain market conditions, especially the likelihood of slightly higher inflation and interest rates than markets have been expecting.
But corrections like the one we’re in aren’t unusual at all. First, some definitions. A bear market is a decline of 20% or more from peak values. A correction is a smaller decline, of 10% or more. The stock market, as measured by the S&P 500, has been in a sustained bull market since early 2009, without a single drop of 20% or more. But there have been 5 corrections since 2009, including the current one.
There were stock-market corrections in 2010 and 2011, and there were actually two in the 2015-2016 timeframe. Some analysts are now comparing the current downturn to 2015. The main trigger in that selloff was a crash in Chinese stocks, and some other problems associated with Asian markets. That’s obviously not an issue this time around. But forced algorithmic selling was a factor then, just as it is now.
Some of the differences between the current correction and the last one may actually be a cause for optimism. “For equities, this looks like a 2015 type of crisis,” JPMorgan analysts wrote to clients on Feb. 8. But, they pointed out, “there is a big macro/fundamental difference between now and the August 2015 market crisis.” The differences: global growth is stronger now, U.S. corporate earnings have been at record highs and may be going higher, and commodities such as oil and copper aren’t gyrating at all on the turbulence in equity markets. Those are reasons to think the current downturn will be relatively short-lived, or at least won’t lead to a genuine bear market.
Which leads to a few other questions readers asked when we invited questions on this week’s news.
How long will the selloff last? Nobody knows, but it would be prudent to settle in for a bumpy ride. “This isn’t over,” Joe Brusuelas, chief economist at financial firm RSM told Yahoo Finance on Feb. 9. “While the worst may be behind us, we should expect several days if not several weeks of more mind-bending volatility.”
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Should I sell? If you’ve made the long-term decision to own risky assets such as stocks, why sell now? Financial advisors are adamant about this: If you’re an ordinary long-term investor, it’s foolish to sell stocks during a downturn, or to try to time the market in any way. Just hold on. Investors should assess their holdings a few times per year, and reallocate assets if necessary, to make sure you’ve got the right mix of risky and conservative investments. But emotional selling during times of turbulence is usually a bad idea.
Should I buy? Up to you, but if you accept the risks of entering a dicey market, then, maybe. There are certainly some Wall Street firms probing for a market bottom, hoping to buy low. Just remember that stocks can always go lower.
Is this like 2008? Almost certainly not. There were profound problems in financial markets during the early days of the financial crash, and the S&P 500 fell 57% from top to bottom. There’s no sign of such deep-rooted problems today, and the underlying economy seems to be in good shape. If the stock-market correction begins to harm the broader economy, that would be a troubling sign—but we seem nowhere near that point.
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Rick Newman is the author of four books, including Rebounders: How Winners Pivot from Setback to Success. Follow him on Twitter: @rickjnewman