The stock market ended a volatile week on a somber note on Friday as the three major US indices tumbled as investors reeled from concerns about inflation, the Fed’s fight against it and fears of a deep recession.
As confidence was also shaken, financial experts advised investors not to panic and instead consider long-term strategies.
The Dow Jones Industrial Average DJIA, -2.82%, closed up 981 points, or 2.8%, at 33,811.40. Friday’s performance was the index’s sharpest daily percentage drop since Oct. 28, 2020, according to Dow Jones Market data.
Meanwhile, the Nasdaq Composite Index COMP, -2.55%, shrank 2.6% and the S&P 500 SPX, -2.77%, shed 2.8%.
TGIF, indeed.
See also: “Waiting for the perfect moment might not be the best strategy”: 3 things investors should do now if stocks fall (again).
Of course, some unsettled retail investors could have already said things were headed that way.
According to the American Association of Individual Investors’ latest weekly sentiment gauge, nearly 44% of people say the market is moving in a bearish direction. That’s nearly 14 percentage points above the historical average of 30.5% of bearish sentiment in the ongoing tracker.
On the other hand, nearly 19% said they were optimistic in the week ending April 20th. That’s up from 15.8% a week earlier. But it has been May 2016 since the bullish sentiment in the running tracker failed to surpass 20% for two weeks.
Meanwhile, six in 10 investors expect market volatility to increase and seven in 10 say they are worried about a recession, according to a nationwide survey released earlier this week.
In the same survey, about four in 10 investors (44%) said they felt more confident about protecting their finances in an upcoming downturn, and 38% said they felt confident about investing in the stock market.
It’s not as if retail investors have some sort of monopoly on sideways market viewing. According to Bank of America, investors took $17.5 billion out of global equities last week. That outflow is the biggest weekly move for exits this year, they noted.
The difference is that regular investors who are new to the markets — and may have started out during the pandemic — may not have the same resources or risk tolerance to hold their stomachs during shaky moments compared to more experienced investors or institutional investors.
It’s important to take a breath and avoid drastic action here, experts say — especially given the ongoing recession talk.
First, there is the short-term story.
“While persistent inflation and a more aggressive Fed pose risks to the economy and financial markets, a recession over the next 12 months is not in our base case,” wrote Solita Marcelli, chief investment officer Americas at UBS Global Wealth Management.
The economy has been able to grow despite the series of rate hikes investors are bracing for, and first-quarter results were “generally good,” Marcelli said in a note.
There’s one exception generally, like Netflix NFLX, -1.24% this week, which reported a net loss of 200,000 subscribers while analysts were hoping for a gain of 2.5 million subscriptions.
Also, there’s the long-term story to remember. Think big and consider the long game when investing during downturns and volatility surges, said Scott Bishop, executive director of wealth solutions at Avidian Wealth Solutions, based in Houston, Texas.
The bearish sentiment among retail investors reflected in the surveys and sentiment trackers is consistent with what he’s currently hearing from his clients.
Still, Bishop says when people feel it’s time to adjust strategies or cut losses, “It’s time to make changes to your portfolio. They shouldn’t make sweeping changes.” That means, for example, that it might be time to reconsider allocations and consider losses for tax losses. “If you invest your portfolio based on headlines, you’re always going to lose,” he said.
The pandemic feels much longer, but it’s only been about two years since the COVID-19 market bottomed. Then there is the second part of the story for people who got stuck in the market instead of cashing out.
At a time like this, it’s definitely worth remembering the next chapter in this story, Bishop said. Ultimately, the people who suffer the most financial pain are the ones who “take extreme action, take binary action, I’m in or I’m out.”