Fear and Frustration: Stock Market Plunge Sparks Concerns for 401(k) Holders
If you’re anxiously checking your 401(k) after the recent downturn in the stock market, you’re not alone. The S&P 500 closed last week with a drop of over 10% from its peak in July, officially entering correction territory. This unsettling milestone has left millions of Americans worried about their investments, as many mutual funds use the S&P 500 as a benchmark.
As of Friday’s close, the S&P 500 stood at 4,117.37, down 10.3% from its recent high on July 31. Additionally, the Nasdaq Composite index, heavily influenced by technology stocks, also experienced a correction and closed at 12,643.01.
Despite this significant market downturn, experts are urging investors to keep calm and remember that dips like these are often short-lived. Ryan Detrick, Chief Market Strategist at financial services firm Carson Group, emphasizes that corrections are normal and occur frequently. Detrick reminds investors that the past three months have been a challenging period, but it’s important to maintain perspective.
So, what exactly does “correction territory” mean? Corrections occur when a market experiences a decline of at least 10% from its previous peak, signaling investor skepticism about future stock performance. While not as severe as a bear market (a drop of 20% or more), corrections are more substantial than pullbacks, which are short-lived drops of less than 10%. On average, corrections happen every couple of years, even during extended bull markets like the one from 2009 to 2020.
The recent stock market decline coincided with rising Treasury yields, making bonds a more alluring option for investors. As the 10-year bond yield exceeded 5% for the first time since 2007 and concerns over economic and geopolitical factors, such as escalating tensions in the Middle East, grew, investors began shifting away from stocks. Detrick notes that despite the recent weaknesses, the S&P 500 experienced its best seven-month performance since 1997 between January and July. A temporary setback shouldn’t be unexpected.
For 401(k) holders, it’s essential to understand the potential impact of a correction. According to Sam Stovall, Chief Investment Strategist at CFRA Research, history shows that the market tends to recover relatively quickly. Pullbacks typically take about a month and a half to return to breakeven, while corrections can take around four months. Bear markets, with declines between 20% and 40%, generally take about 13 months to recover.
Stovall advises investors to keep in mind the phrase, “This too shall pass.” If investors do not have a long-term investment horizon, stocks may not be the most suitable option for them. However, taking action during a market downturn may be an option. Stovall suggests rebalancing portfolios, purchasing high-quality stocks that have fallen in price, or considering tax loss harvesting, which involves selling losing stocks to offset capital gains.
Nevertheless, Stovall’s ultimate advice is to resist making emotional decisions and refrain from acting rashly. The last thing investors want is for their emotions to dictate their portfolio decisions. Patience and a steady hand are crucial during times of market volatility.
While the recent stock market plunge has undoubtedly caused concerns, it’s essential to remember that market recoveries are common. Although no one can predict precisely when the market will bounce back, history has shown that resilience is a fundamental characteristic of the stock market. So, for now, take a deep breath, keep a long-term perspective, and trust that better days are ahead.