Moneybox

Please Don’t Panic About the Stock Market

A trader on the New York Stock Exchange
Stay cool.
Reuters

So, things got a little ugly in the stock market today. All the major indexes tanked. The Dow Jones Industrial Average was especially dramatic, falling almost 1,600 points in the afternoon before swinging back up a bit. The much more important S&P 500 has now erased all of its gains for the year. People are going on CNBC to talk about how the market “snapped like a twig.” If you’re an equities trader, it’s definitely a Johnny-Black-neat sort of evening.

As for the rest of us, there really isn’t any reason to panic. Stocks go up and stocks go down. And while your 401K is almost certainly a bit less flush than it was a week ago, it’s not really clear why today’s selloff was so severe, or what it portends for the markets going forward.

In meantime, here are a few key things to keep in mind.

1. Stocks did not crash today

Shares fell this afternoon. A bunch. The S&P 500, which tracks the value of America’s largest companies, dropped 4.1 percent total. But you know what? These things happen. The S&P plunged 3.94 percent on August 24, 2015. It fell 3.19 percent the day before that. How come? People were worried about China and oil. You probably don’t remember it, because why the heck would you? Stocks bounced up and down for a while (again, nobody remembers this) before setting off for a long rise in 2016.

About the Dow: It finished down almost 1,200 points today. That sounds like a lot, because it’s a biggish round number, and casual news consumers have been programmed to interpret any drop in the Dow of more than 500 points as cataclysmic. But now that the thing routinely hovers around 24,000 or 25,000 points, a 1,000 point swing doesn’t quite mean what it used to. Percentage wise, it was a 4.6 percent fall. As one Wall Street Journal editor pointed out, there have been more than 100 days where the index performed worse.

Also, keep in mind that bad as the past couple days have been, stocks are basically back to where they were at the end of December. If you put money into an S&P 500 index fund a year ago, you’re still up about 15 percent.

2. It’s not clear why the selloff was so bad

There’s a school of thought that says it’s more or less impossible to accurately explain why the stock market moves up or down on a given day, and that it’s basically futile—or, worse, deceptive—for journalists to even try. On a lot of days, that’s true. Today, it was probably half true.

The market selloff we’re now witnessing started last week. It intensified on Friday, after the Department of Labor reported that wages were growing faster than expected. As I wrote earlier today, this seemed to spook investors because it raised the possibility that the Federal Reserve will hike interest rates quickly in order to prevent inflation—and higher interest rates are bad for stocks. In other words, stocks appeared to take it on the chin because money managers though the economy was too strong, and new Fed chair Jerome Powell might try to cool things off.

When stocks opened lower this morning, it seemed like more of the same jitters. But then this afternoon shares plunged and bungee jumped around and all reasonable explanations rooted in economic data kind of went out the window. CNBC called it a “bizarre tizzy.” Traders chalked it up to a combination of run-of-the-mill panic and algorithm-driven trading. It’s hard to know what that means for tomorrow or the day after, much less the next month or year.

Just to make things a bit murkier, not everybody even agrees that the initial selloff that started Friday had anything to do with the Fed. Per the Financial Times:

David Kelly, chief global strategist at JPMorgan Asset Management, disagreed with the “popular narrative” that equities have been “tanking” because of fears interest rates would rise due to higher inflation.

“The somewhat untidy but nevertheless more plausible explanation is that both the bond market and stock market were overdue for a correction after a remarkably placid two years,” Mr. Kelly said.

Or, to paraphrase, stocks go up. Stocks go down. Maybe today marks the end of the long bull market. Maybe it’s a blip. Neither scenario is a reason to panic.

3. As always, invest for the long term

I know, it’s a cliche. But the best way to avoid worrying about the stock market is to only invest money if you can afford to let it sit there through some ups and downs. My personal rule of thumb is to only buy stocks if I won’t need the money for at least a year (and by “buy stocks,” I mean move money into my robo-advisor account). This is not the time to start messing with your 401K, or to think about buying Bitcoin on the dip. It’s a moment to breath, ignore the barking on CNBC, and just leave your money alone.

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