It’s been a steady and mostly uneventful week in the U.S. stock market – and that’s a good thing.
After a tumultuous start to the year with the longest losing streak since 2001, key indicators including inflation, jobs reports, and consumer spending are at smoother levels, and may even point toward economic recovery.
There are some talks about a potential recession and though we’re not entirely out of the woods just yet, the U.S. labor market remains healthy. Inflation has likely peaked based on hiring slowdowns and consumer data, and that slower market growth “isn’t bad for the long-term health of the market, because of how high valuations were getting,” says Thomas Muñoz, financial life advisor at Telemus, a financial advisory firm.
Will the Stock Market Recover?
The market narrowly avoided bear market status just two weeks ago. A bear market is defined as a 20% or more drop from a recent peak.
“The market often has extended downturns beyond 10%,” Muñoz explains. “They often begin with a singular event. That event was inflation.” To those still fearful, he says, “the stock market is the only market where people are afraid to buy things at discounts. The market is up over 80% since March of 2020.”
Remember, investments outpace inflation — even with the normal ups and downs of the market. “Historically speaking, markets are going to outperform over the long term,” says Michelle Katzen, Managing Director, certified financial planner, and CDFA at HCR Wealth Advisors. It’s important to keep investing.
The stock market ebbs and flows and this is why experts recommend broad-market index funds for diversification and protection against any individual sector or company taking a nosedive. In the case of market downturns, they’re a smart way to protect your long-term investments.
“Dollar-cost averaging works in environments like this,” Muñoz adds. Dollar cost averaging means putting in the same amount of money into the stock market, regardless of what’s happening. “Always tell yourself why you’re investing and keep your purpose in mind.”
What’s happening now is a natural part of the investing cycle. The market did well this week, but we should keep in mind that inflation, ongoing supply chain issues, and a Federal Reserve that wants to raise interest rates are still obstacles to overcome.
That’s because the market always looks forward and reacts quickly. As an investor, you should look forward, too – but instead of reacting, the best response is to stay the course and keep investing, despite what the market is doing.
On top of that, the ongoing war in Ukraine reached 100 days this week, and there are still a few more interest rate hikes from the Fed set for later this year – so there are still many factors affecting the overall market and investor sentiment.
How Investors Should Deal With Stock Market Volatility
For new investors, big swings in the market can be a lot to handle. There’s a lot of uncertainty right now because of interest rate hikes, increasing real estate prices, and everyday commodities getting more expensive because of inflation — and the market reflects that on a day-to-day basis.
But if you have a buy-and-hold strategy with low-cost, broad-market index funds, remember that slow and steady wins the race. The best performing portfolios are ones that have the most time in the market.
“The most important thing is to always remember what you’re investing for,” says Muñoz. “Short-term volatility is obviously something people should be aware of. But if you have a long-term time horizon, historically the stock market goes up. And when that’s the case, it’s important to have the discipline to keep dollar-cost averaging your [investments].”
Dollar cost averaging spreads out your deposits over time, and has demonstrated that it performs better “during a period of high market crashes,” says according to Rebecka Zavaleta, creator of the investing community First Milli.
Whatever you do, invest early and often, especially if you have a long investment timeline. Dips and crashes will happen, and so will other scary-sounding things like economic bubbles, bear markets, corrections, death crosses, and recessions.
You can even take advantage of a dip to invest more, but not if it impacts your regular investing schedule, Muñoz advises. It’s hard to tell when there’s going to be a dip or correction, and “not even the best investors in history can time the market.” The best advice is to stick to your plan and keep investing.
