Featured In Nextadvisor – The Stock Market’s Worst Year Keeps Getting Worse. What Investors Should Do.

Daly shares her thoughts on the market volatility and how investors can keep their calm.

By Harlan Vaughn

The Stock Market’s Worst Year in More Than a Decade Keeps Getting Worse. What Investors Should Do

The U.S. stock market closed the week, month, and quarter sharply in the red.

September is shaping up to be the worst September for the stock market since 2008. The S&P 500 sank to a new low for the year and is on track to have three consecutive quarters of losses for the first time since the 2008 financial crisis. The Nasdaq Composite and Dow Jones Industrial Average aren’t faring much better, with the Nasdaq down 9.1% this month and the Dow down 8.3%.

What’s going on? Investors are reacting to news of an ongoing hot labor market with five-month unemployment lows and a report that showed the core personal consumption expenditures price index (PCE) – the Federal Reserve’s preferred measure of inflation – up 4.9% year-over-year and up 0.6% from July to August, despite rapidly falling gas prices.

This follows the Fed’s latest 0.75% interest rate hike earlier this month and suggests that inflation is still running too hot for comfort. In the effort to tamp down inflation, the Fed wants to see increased jobless claims and slowing inflation from month to month as proof that the interest rate increases are working.

Because this clearly isn’t happening, investors have fresh concerns about future interest rate increases, prompting broad-market sell-offs in an ongoing bear market that’s cost investors a collective $9 trillion so far this year.

“We’re obviously in a challenging market environment, especially for long-term investors who are seeing big cuts in terms of their holdings,” says Daly Andersson, CFA, CFP®, co-owner and managing partner at Tenet Wealth Partners.

Expect more volatility this year, she advises. Russia’s war against Ukraine, Covid-19 lockdowns in China, weather disruptions like the hurricanes this week in Florida and South Carolina, and Europe’s upcoming energy crisis all play into the global market. “We have so many other economies that impact how the U.S. stock market performs,” Andersson says.

So what should investors do? “It can be hard to separate emotions from your own money, but [letting your emotions guide your actions] doesn’t always lead to the best long-term decisions,” says Andersson. “We’ve all experienced this pain, but we know historically that trying to time markets is not typically a winning proposition.” 

Experts recommend staying the course and dollar-cost averaging toward your long-term investment goals, regardless of what the market is doing.

PRO TIP
Even – and especially – when there’s volatility in the stock market, the best course of action is to be aware but stick to your investing plans. It’s impossible to time the market, and historically speaking, it’s always recovered. Stay the course through the dips and peaks, and remember why you’re investing.

Why the Federal Reserve Is Raising Interest Rates Right Now
Two of the Fed’s central mandates are to maintain low unemployment and keep prices stable. It does that through monetary policy, including adjusting the money supply in the country to make interest rates move toward the target rate they set.

Higher interest rates mean higher costs of borrowing for businesses and individuals, which should cool down demand and reduce long-term price growth. However, raising interest rates too high could potentially lead to an economic recession in the short-term, which the Fed wants to avoid – but it’s a tricky balance to get right.

Inflation spiked in mid-2021 due to a combination of factors, including supply chain issues and demand imbalances stemming from the COVID-19 pandemic, and has remained persistently high ever since.

“The Fed has been very explicit that they are very committed to squashing inflation,” Andersson says. “They want to prevent it from becoming fully entrenched in the U.S. economy, which would have much more drastic effects on the overall market if inflation continues at the current level. So, the Fed is doing what they think is absolutely necessary to get inflation under control.”

Are We in a Recession?

The U.S. GDP contracted in the last two quarters, meeting the definition of a recession.

“By technical and historical definitions, we are in a recession,” says Linda García, founder of In Luz We Trust, a financial community geared toward Latinx investors.

Economists still say it’s too early to tell if we are in a true recession, but the technical definition of a recession is of little concern to Americans who are dealing with soaring prices, rising interest rates, and job layoffs.

The labor market is caught between wage growth in some industries and layoffs in others. For now, it’s holding stronger than desired for the Fed, which wants to see the unemployment rate closer to 4%. It rose to 3.7% in August.

You’d think higher unemployment would be a bad thing, but it’s counterintuitive. This is a case of “bad news is good news.” That’s because, as the Federal Reserve raises interest rates, investors want to see a softer job market – with higher unemployment – as proof that inflation is finally starting to fall.

Because of these factors, García explains, the market is finding itself in a reset. It’s a great time to start investing in the stock market, especially if you’ve been watching from the sidelines for a while. “This is a really great opportunity for folks to either start learning about the market, start participating, or continue to be diligent in their monthly investments into the stock market.”

Despite what the market is doing, the best course of action is to stick to your plan and to keep investing.

“It’s just temporary at the end of the day,” says García. “And five to 10 years from now, we’ll be looking at this moment and be like, ‘Why didn’t we buy more?’”

Ups and downs are a natural part of the investing cycle – and if anything, right now is an excellent opportunity to keep dollar-cost averaging in broad-market index funds at a lower cost basis.

Will the Stock Market Recover?

September has been the worst-performing month for the S&P 500 and Dow since 1950 and the worst for the Nasdaq since 1971, according to historic data from Stock Trader’s Almanac.

“Historically, if September’s down, then we move into a fourth quarter of being down,” García says.

From 1921 to 2021, the Dow had 36 years of a losing September that ended with an overall negative year, so there is correlation that points to an upcoming negative Q4 (and year).

October is also notorious for market crashes, including the infamous Black Monday in 1987 and the meltdown that led to the Great Depression in 1929. That could be negated though, as the market tends to perform well in midterm election years like this one, and of course, Q4 could see increased consumer spending for a holiday with reduced Covid-19 concerns.

The market also retested its previous June lows this week and investor sentiment is down, which isn’t an encouraging way to end the quarter.

Whatever happens, experts are expecting a volatile finish to the year – and where the market is headed is anyone’s guess.

Keep in mind, investments easily outpace inflation over time – even with the normal ups and downs of the market.

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 the ones that have the most time in the market.

“The most important thing is to always remember what you’re investing for,” says Thomas Muñoz, financial life advisor at Telemus, a financial advisory firm. “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.” As an investor, the best response is to stay the course and keep investing, despite what the market is doing.

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