The Stock Market Crash. Should You Be Concerned?

Despite the recent sell-off in stock markets, sticking with your investment plan is still the best strategy.
There are signs that the market could soon bounce back in a so-called relief rally.
It’s important to remember that although this year has been tough, the stock market always bounces back eventually.

The market has been tough this year.

Really hard.

Year-to-date, the S&P 500 is in correction territory, down over 12%, and the NASDAQ? Forget it. It is in a bear market and is down over 20%. They don’t even want to know how badly some of the high-flyers of the past year are in the red. Let’s just say it’s a lot.

If your portfolio is a sea of red, your head might be spinning.

It will be fine.

It may not be tomorrow, next month, or this year, but the stock market is a fantastic wealth-generating machine, and over time, the dramatic sell-off we’re witnessing will simply be another data point on a chart.

Nothing more. Not less.

Do not believe me? Check out the arrows in the chart below, which show the historical prices of the S&P 500 ETF (SPY) since 2007. The Great Recession, quantitative tightening in 2018 and COVID in 2020 made for terrible markets, but the market – eventually – marched higher.

Still need some convincing? The S&P 500’s annual return is its worst in 30 years. Yet the S&P 500 is up over 870% since 1992. Sure, there were some gnarly moments in the early ’90s, but now you really have to squint to see them.

Stay the course

Often, “I can’t hold it anymore” moments shake investors during brutal shoots. However, the regret felt over emotionally-driven panic selling will be felt when stocks eventually recover.

The internal dispute reads: “I couldn’t take it, so I sold everything. Now the market is recovering, but I don’t think so. It won’t last. There is too much wrong for stocks to go higher.”

I’ve heard that argument many times in my career. Eventually, the seller becomes the buyer again, but only after missing the biggest move higher.

Remember that the average return in the first year of a bull market is 38%. That’s significantly better than the 12% average return in its second year and the market’s 10% average annual return since 1926.

It’s not just missing the first year of the bull market, though. It can get costly if you’re missing out on even a few of the market’s best-performing days by selling.

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According to JP Morgan Asset Management, a buy-and-hold investment grew from $10,000 on January 1, 2002 to $61,685 on December 31, 2021. However, missing the top 10 days in that span reduced the nest egg to $28,260 U.S. dollar. If you weren’t in the market during the best days, you gave up 334% of the cumulative return.

Indeed, enduring the Great Recession, the swoon of the fourth quarter of 2018, and the COVID-fueled madness of 2020 hasn’t been fun. When stocks are falling, you can’t do anything right. But when do they go up? You feel like Midas.

I don’t know when the market will bottom. Nobody has a crystal ball. But I know the market pain is great and investor sentiment is dire. The overall put/call ratio is bullish above 1. The American Association of Individual Investors (AAII) sentiment poll is below 20%, among the lowest readings since the early 1990s. The number of stocks trading 5% or more below the 200 DMA is relatively high. And the Volatility Index (VIX) is back above 30 for the first time since the March lows.

In There Might Be Light at the End of the Tunnel, Real Money Pro’s Carley Garner writes:

“The VIX spends most of its time below 20 but may see temporary spikes. In the past the VIX has struggled to break above 35-40 but during the Covid crash and financial crisis it did. Still, any stock market sell-off accompanied by a VIX peak near 35 has generally led to a rebound in stock markets… While traders should remain cautious, we see a potential head-and-shoulders pattern in the VIX. A head-and-shoulders pattern is exactly what it sounds like, it’s a three wave rally with the two shoulders registering lower highs than the middle rally (head). Traders believe that a break below the neck line will open the door for quick selling. If this pattern proves true, the VIX could move back towards the middle. Teenager. That would be positive for the stock market.”

There is fuel for a fire.

Could the Fed’s next rate decision be the spark? Finally, the May 4 meeting may not offer “shocking” revelations. The market is already pricing in a dump truck full of tightening, including rate hikes and a bond run-off on its balance sheet. So could it say something surprising? For sure. But if not, then we might get a buy-the-news rally.

Back to Garner:

“Some of the stories that led to corrective action in equities may have run their course… It should also be noted that the Fed has not always been able to push through on its rate hike campaign ambitions (remember 2019/2019? ). Perhaps the market has priced in more rate hikes than the Fed can or must deliver.”

Or maybe the spark is coming from somewhere else. As Stephen Guilfoyle wrote in Real Money’s Market Recon earlier this week, we received Thursday’s “preview (first of three) of US Q1 economic growth”. GDP is slowing. Maybe that’s encouraging because it means inflation will come down and the Fed won’t have to rise as much as forecast?

Again pure speculation.

But there is evidence that if the market sells off a bit more we will become oversold (at least in the short term) and if the market is oversold it may not take much to ignite a rally fuse.

In “Waiting for Surrender? All I can offer you is that.” Top Stocks’ Helene Meisler uses oscillators to determine whether the odds favor bulls or bears.

The bears are still in control, but Meisler’s indicators might turn more friendly in the coming days. Meisler writes:

“I can now report to you that the indicator will stop falling late this week/early next week. It doesn’t shoot straight up, but it stops going down. That’s a change. It is also a sign of near-term “oversoldness.”

If so, then a move to net long by Real Money Pro’s Doug Kass this week could prove prescient (if you missed Monday’s Smarts column, here it is again).

Kass reiterated his increasing upward trend in his diary today, writing:

“I have long written that one should invest and trade without emotion… Today, as the Bee Gees sang, emotion has taken over the markets… A market lately dominated by overly passionate and emotional activity is an opportunity for the tactical Trader and investor… Typically, such an opportunity doesn’t come from selling (to those who “don’t care”) – but selling emotionally could provide a birthright for reasonably attractive entry points.”