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Wow, that’s enough to scare anybody to death. Don’t read too much into this headline. The Dow only dropped 4.6% yesterday. A correction is defined as a 10% plus drop. On average a correction occurs about once a year. The last time a correction occurred was during the financial crisis in 2008/2009 where we saw a greater than 50% drop. They last anywhere from 20 trading days to 104 days generally. Corrections are unnerving, but, they are a healthy part of our economic system. Why is this happening now?
- Rising interest rates and concerns that the Fed will have to raise interest rates faster than expected to combat any signs of inflation.
- Worries about the bond market. More people could now look for yield in bonds which could cause stocks to drop.
- Investors are wondering if the market has come too far too fast.
To put this drop in perspective, the stock market has given back only the gains from 2018 – not any of the historic gains from the year prior, at least at this point. And, today the market recovered one-half of yesterday’s loss! We could see some big swings as we work through this uncertainty in the coming days and weeks. Investors don’t like uncertainty. The markets move higher or lower based on human emotion and the anticipation of what could happen. Long-term investors are rewarded for their patience as short-term traders take the hits from reacting to their emotions and selling.
Our advice: Don’t place too much weight on the headlines, keep your focus on the long-term, and appreciate how much your investment accounts have risen over the past year even if you have to give a little back in the short term.