Traders work on the floor of the New York Stock Exchange at the opening bell January 25, 2022. TIMOTHY A. CLARY | AFP | Getty Images
Stocks have taken a beating in January. The S&P 500 index, a widely cited barometer of U.S. equities, touched into “correction” territory for the first time since the pandemic-fueled market turmoil in March 2020. Just what does that mean and what should investors know? A “correction” applies when stocks fall 10% or more from a recent high.
In a wild day of trading on Monday, the S&P 500 stock index — a basket of the country’s largest publicly traded companies — sustained heavy losses. At one point it was down more than 10% from its high mark on Jan. 3. The index eked out a slight gain after a late-day rally, but was again teetering on a correction as of early afternoon New York time on Tuesday. But investors shouldn’t panic — the ups and downs are a regular feature of stocks, according to financial experts. Investors who sell as a gut reaction to the carnage often do themselves financial harm in the long run. “It’s not very rare to see them,” Stephanie Roth, senior markets economist at J.P. Morgan Private Bank, said of corrections. “But of course every time you’re in one, it doesn’t feel good.”
Frequency
The S&P 500 has experienced a correction in 21 of the last 41 years, according to J.P. Morgan Private Bank. However, U.S. stocks delivered a positive annual return in two of every three years in which a correction occurred. That suggests staying invested over the long run pays off — though data suggests investors often sell during dips and miss those recoveries, according to J.P. Morgan. Volatility is a key feature of stocks — a risk that generally rewards long-term investors.
“It’s ‘stay the course’ – the market goes up and down,” Dan Herron, a certified financial planner and founder of Elemental Wealth Advisors in San Luis Obispo, California, said of his typical advice to clients during stock gyrations. In fact, it may be a good opportunity to buy more stocks, for investors who have the means, since stocks are selling at a discount from recent high prices, Herron said. The dynamic of falling stocks may also mean investors’ portfolios are automatically rebalancing themselves to their target weighting of stocks to bonds, following a year of lofty stock returns in 2021.
Financial impact
Missing big positive swings in stocks, which often occur within days of the initial plunge, can have a significant impact on one’s returns. For example, a $10,000 investment in the S&P 500 would have yielded a roughly 9.2% average annual return from December 2001 to December 2021, according to J.P. Morgan Asset Management. But that return fell by almost half (to about 5%) for investors who sold and missed the 10 best days over that period; it was almost 0% for those who missed the 30 best days.
Recovery