Stocks ended their worst week in two years Friday, with the Dow dropping 665 points or 2.5 percent, its largest decline since June 2016. (Feb. 2)
It was the exclamation mark to a lousy week in the stock market — a 666-point drop Friday that could scare many investors and prompt them to reassess their portfolios.
But let’s get real.
A blizzard of stories and commentaries warned that a correction, or 10% drop, was not only overdue, but normal and just a matter of time. Even as the Dow Jones industrial average broke through the 25,000 barrier and galloped past 26,000, the market refused to break stride.
Even though Friday’s point drop was scary, the percentage decline wasn’t. At 2.5%, it wasn’t even close to the record, a 22.6% rout on Black Monday in 1987.
The question for investors now is what to do next. Here’s some advice.
1. Don’t panic and stay the course
If you flee stocks now, you’re going to miss out on potential gains ahead.
Economists remain bullish on growth.
“We expect fiscal policy, financial conditions and firming global outlook to support strong economic growth of 2.7% in 2018,” Nomura economist Lewis Alexander said in a note.
Experts have been predicting a correction. From the Dow’s peak of more than 26,000 in late January, it would take a 2,600-point drop to hit that 10% level, and Alan Skrainka, chief investment officer for Cornerstone Wealth Management, has been predicting that’s what will happen this year.
2. Consider buying the dip
Should you take advantage of the dip to buy more stocks?
The bull market is showing its age but few think the good times are at an end.
The nation’s unemployment rate, at 4.1%, is at the lowest level since December 2000. The tax-cut package delivered some of the biggest gains to corporations, and the benefit to profits is likely to support stock prices through the rest of the year.
But if you decide to snap up shares at lower prices, be selective, advises Joe Quinlan, chief market strategist for U.S. Trust. Consider your tolerance for risk over the long run, because your nerves are going to be tested as the market gets bumpy amid rising long-term interest rates.
In the U.S., Quinlan sees opportunity in financials, health care and industrials. Looking abroad, he favors stocks related to the e-commerce boom in China and robotics production in Japan.
3. Or wait and watch
The market may rebound in a big way following the recent turbulence, but it may take time..
Sam Stovall, chief investment strategist for CFRA, is predicting further declines before stocks stabilize.
Given that the market has gone so long without a major setback, investors may be leery about jumping back in right away.
4. Realize the sell-off is a blip
Since 1900, the U.S. has seen 125 corrections of 10% or more, which is about one a year. Yet the market always goes on — and eventually up. Since 1980, the stock market has had positive annual returns in 28 of the last 37 years, Skrainka points out.
Remember that the drop Friday follows a 25% rise in the Dow last year.
“It’s really not much of a sell-off,” says Stephen Janachowski, CEO of Brouwer and Janachowski, a wealth management firm based in Mill Valley, Calif. “A 3% to 5% decline doesn’t scream ‘buy’ or ‘sell.’ “
Investors who are already invested should take a deep breath and sit on their hands, he says. Those who were looking for an entry point can gradually buy into the market if it falls further.
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