The Market Crashed, Now What Do You Do?

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This might have recently popped up in your news feed; the stock market has recently crashed! OK, crash is probably too strong of a word, but no doubt the recent downward movement of stock prices has investors jittery. In just the past few days the Dow Jones Industrial Average, which is what most people are referring to when they talk about the “stock market,” has fallen in value by just over 10%. We saw the two largest single day point drops in history for  the Dow, with the market falling 1,175 points on Monday and another 1,032 on Thursday. This has left a lot of people wondering how bad it’s going to get and what they should do.

What’s going on?

When the stock market falls 10% or more from a recent high, it’s referred to as a “correction.” The word implies that the price of stocks was too high to justify and needed to be corrected to a lower price. Stocks have done exceedingly well over the past two years gaining nearly 60% from January 2016 to the most recent peak.

Corrections are part of a normal stock market and they actually happen pretty frequently. According to Deutsche Bank, a stock market correction occurs once a year on average. The 10% downturn that took place over the past week represents the first correction we’ve seen in two years, so you might say it was overdue. On average, market corrections last three to four months with stocks falling about 13% before starting to gain again.

What’s causing this correction?

Believe it or not, the fact that our current economy is so strong has investors worried. There are two main reasons for this:

1. Unemployment is at a 45 year low. When the unemployment rate remains low for extended periods, it forces employers to raise wages because the pool of people looking for work is much smaller. Employers need to outbid other companies to attract and keep their workers.  While this sounds like it should be great for the economy, the downside is that the more money people make, the more they spend. When people spend more, the price of everything goes up. If prices rise too quickly it can put the brakes on a hot economy.

2. The economy had essentially been put on life support after the 2007-2008 financial crisis. Since that time the Federal Reserve had done all it could to artificially lower interest rates in an effort to help people and businesses borrow and spend more money. As the economy has improved, the interest rates have been increased. Investors are worried that interest rates will increase too rapidly creating challenges for individuals and businesses.

How bad will it get?

Obviously, this is impossible to answer. It could be over tomorrow or it could continue for the rest of the year. The rate at which stock prices have fallen probably has even experienced investors rattled. Because of this, the chances are good that stock prices could come down more. However, the reasons behind why the market has fallen (increased worker salaries, rising interest rates due to a strong economy, and simply because we were overdue for a correction), suggests that the market could recover faster than usual.

What should I do now?

“Everybody has a plan until they get punched in the mouth.” -Mike Tyson

First, take a step back and remember why you’re investing. If you’re investing in the stock market for your short term goals, you’re going to feel some pain, but if you’re investing for the long term, temporary downs in the market won’t hurt you. In fact, when the market prices come down, you have an opportunity to buy  shares at a discounted price. While there’s no predicting the future, the stock market has historically done especially well after corrections. If you have a long-term plan, take some time to review it and make sure the fundamentals are sound and appropriate for the timeline you have to reach your goals, then stick to it even if you feel like you’ve just been punched in the mouth.