2022 is off to a rocky start. The Omicron variant had an
estimated 8.8 million Americans either out sick or caring for someone1
in early January, adding pressure to an already strained labor market.
Inflation readings and gas prices show little signs of abating, and the Federal
Reserve has pivoted to a more hawkish stance with interest rate increases in
the offing. Geopolitical pressures are also building quickly between Russia and
Ukraine.
As worries swirl, most major U.S. stock indexes have endured
sharp selling pressure. What we’ve seen so far are double-digit declines over a
very short period, largely on fears related to inflation, rising interest rates,
the pandemic, and geopolitical flare-ups. In
other words, investors are worried about recycled, widely-known, and understood
fears – a classic sign of a correction, not a bear market.
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How to Keep Your Investments on Track During a Market Correction
As a result of the market correction, you may feel the urge
to make drastic moves, but do not fall prey to this mistake. Instead, remember
to think long-term!
To help you do this, we are offering all readers
a look into our just-released February
2022 Stock Market Outlook report. This report will provide you with our
forecasts along with additional factors to consider:
- Zacks rank S&P 500 sector picks
- Zacks view on equity markets
- What produces optimism in 2022?
- Zacks forecasts for 2022
- Zacks ranks industry tables
- Sell-side and buy-side consensus
- And much more
If you have $500,000 or more to invest and want to learn more about these forecasts, click on the link below to get your free report today!
IT’S FREE. Download the Just-Released February 2022 Stock Market Outlook2
______________________________________________________________________________
If I had to give four defining features of a stock market
correction, here’s what they would be:
- Sudden, sharp declines in equity prices
- Pervasively negative sentiment among investors
and consumers
- No material changes to economic or
corporate earnings fundamentals, which remain strong
- The ‘causes’ cited for the market
correction are well-known, widely-discussed factors (in the current case:
inflation, interest rates, Fed hawkishness, geopolitics)
I
believe we’re seeing all of these features today. The latest American
Association of Individual Investors (AAII) Sentiment Survey showed that bullish
sentiment had fallen to an 18-month low, while bearish sentiment rose to a
16-month high. Only 21% of investors were bullish about the stock market over
the next six months, compared to 46.7% of investors who are bearish. Investor
sentiment is often useful as a contrarian indicator.
The
last time investors were this bearish was in early September 20203,
when inflation and supply chain pressures were all over the news, and as the
Delta variant created headwinds in the economy. But we know the end of last
year was not a good time to be bearish – the S&P 500 rose +11% in Q4 alone4.
On the flip side, any time a majority of investors are bullish and euphoric
about upside potential, it’s usually a sign to run the other way.
At the end of the day, downside volatility in the equity
markets is always unpleasant, but it is also very common – over the last 42
years, the S&P 500 has experienced an average intra-year correction of
-14.0%. Corrections happen all the time. In 2021, however, volatility was
unusually low – there were only 55 trading days with moves of 1% or more in
either direction (compared to 109 in 2020), and only seven days with a move of
2% or more. The biggest market pullback for the year was around -5%.5
A market correction in 2022 was to be expected, in my view.
The issue that often troubles many investors – and ultimately hurts them – is that they let volatility increase their temptation to “time the market,” allowing short-term uncertainties to drive their decision-making. But it’s important to remember that volatility works both ways. Rapid declines are often followed by rapid recoveries.
When an investor gets caught up in the negative news stories
and sells into the downside of a correction, it often means capturing the
losses but failing to participate in the recovery, which is a recipe for
sub-optimal returns over time. Famed
mutual-fund manager Peter Lynch once quipped that “far more money has been lost
by investors preparing for corrections, or trying to anticipate corrections
than has been lost in corrections themselves.”6
Corrections can lead even the most steely-nerved investors
to make emotional knee-jerk reactions that adversely affect long-term returns.
In my view, it is smarter to just stay the course and keep focused on the
long-term.
Bottom Line for
Investors
When the market takes a sudden and sharp turn, investors
often get rattled and start questioning their asset allocation. Getting worried
and second-guessing is a normal, natural, and understandable response. Volatility can serve as an opportunity to review
your asset allocation and make sure your portfolio is diversified and aligned
with your long-term goals. But if you’re feeling the urge to react and
‘do something about it,’ I’d strongly urge you to reconsider. If your goals have not significantly
changed in the last week, then in all likelihood, your investment portfolio
shouldn’t change either.
To help you focus on factors that can prepare your investments for volatility and other market outcomes, we are offering all readers our Just-Released February 2022 Stock Market Outlook Report.
You’ll discover Zacks’ view on:
- Zacks rank S&P 500 sector picks
- Zacks view on equity markets
- What produces optimism in 2022?
- Zacks forecasts for 2022
- Zacks ranks industry tables
- Sell-side and buy-side consensus
- And much more
If you have $500,000 or more to invest and want to learn more about these forecasts, click on the link below to get your free report today!
Disclosure
1 Wall Street Journal. January 23, 2022. https://www.wsj.com/articles/omicron-wave-drives-surge-of-workers-calling-in-sick-working-through-illness-11642933802?mod=djem10point
2 Zacks Investment Management reserves the right to amend the terms or rescind the free Stock Market Outlook offer at any time and for any reason at its discretion.
3 American Association of Individual Investors. January 20, 2022. https://www.aaii.com/latest/article/15894-aaii-sentiment-survey-bullish-and-bearish-sentiment-reach-levels-not-seen-since-2020
4 Strategas. January 2022.
5 J.P. Morgan Guide to the Markets. Slide 16. December 31, 2021. https://am.jpmorgan.com/us/en/asset-management/adv/insights/market-insights/guide-to-the-markets/
6 Acumen Wealth Advisors. April 8, 2018. https://acumenwealth.com/acumen-wealth-advisors-q1-2018-market-insights-commentary/
7 Zacks Investment Management reserves the right to amend the terms or rescind the free Stock Market Outlook offer at any time and for any reason at its discretion.
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