Market Downturns and What to Do in the Stock Market Now

With the stock market now showing signs of a possible correction, it pays to have a little perspective and stay rational.


Reflection of stock market now in window at dusk

“The market can’t go up every day.” I’ll never forget that line, uttered many years ago by Investor’s Business Daily founder and investment visionary Bill O’Neil. It’s relevant in the stock market now, as indexes turn sharply lower on legitimate concerns about inflation.

Back in 2010, after the S&P 500 was rallying back from the Great Correction, I was working at Investor’s Business Daily as a market editor, investing instructor and video host. In that role, I was fortunate enough to frequently collaborate with Bill O’Neil and get insights into his investing thought processes.

On one particular day, I was with some other colleagues in Bill’s office, reviewing notes for an upcoming presentation. The discussion turned to the decline in the broader market on that particular day, with a few people, including myself, bemoaning the action.

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Bill gave us all a look that indicated his bewilderment with our assessment. Then he uttered that line: “The market can’t go up every day.”

For any long-term investor with a patient view of the markets, downside days, weeks, months and even years are normal and not something to panic about. In the short term (including the stock market now), it’s not even something to become discouraged about.

After leaving Investor’s Business Daily, I got my securities license and became a fiduciary financial advisor for several years. Meeting with hundreds of people in my office or at seminars, I learned that investors have short memories. Big losses stand out, with many people vividly recalling huge portfolio declines in 2008.

But I also learned that people don’t recall their emotions about the cycles of market ups and downs, even if they fretted about it at the time.

Some people thought the market was in a permanent downward spiral, spurred by a constant drumbeat of negativity in the daily news. Others were pleased with their gains over time, and by 2014 or so, had largely forgotten the 2008 slaughter and were not even cognizant of past yearly performance anymore.

What can taking the past into perspective tell us about the stock market now? As a reminder, here are the total returns of the S&P 500 over the past 10 years:

2011: 0% (There was a lot of choppy trade and a sharp downturn in August, but the market ended up almost exactly where it started.)

2012: 13.41%

2013: 29.60%

2014: 11.39%

2015: -0.73%

2016: 9.54%

2017: 19.42%

2018: -6.24%

2019: 28.88%

2020: 16.26%

That last one, of course, is perhaps the most startling and counterintuitive data point on the list. But it’s a perfect illustration of how the market doesn’t necessarily behave in the way you think it should or expect that it should. It’s also an illustration of how the market goes through regular ups and downs, but over time, investors see gains.

So with the stock market now in a correction, what should you be doing?

What to Do in the Stock Market Now

If you approach the market as a trader rather than an investor, be sure you can tolerate any losses. If not, sell and cut your losses. Consider adding stops if you want to limit your downside.

If you feel comfortable holding through a correction, and you have a longer time frame for your stocks, then be sure the earnings and sales outlook is strong.

For example, say you hold Apple (AAPL), which is down 4.28% so far in May. Earnings and revenue growth accelerated in the past two quarters, and analysts expect earnings per share of $5.13 this year, up 56% over 2020. Wall Street is eyeing growth of 4% in 2022, to $5.33 per share.

Apple is clearly a company with a wide economic moat. Users (including myself) like the convenience of its operating system across multiple devices, and the relatively intuitive ease of navigating various apps and system functionality.

That’s a stock you might consider holding through a downturn. Bear in mind, I’m not making a recommendation here, just using Apple as an easy-to-understand example.

But if you own a smaller, less liquid stock with a poor earnings and sales outlook, seriously consider selling and taking a smaller profit or even cutting a loss. You can always buy the stock back later, when the market goes into a confirmed uptrend.

How about if you have a diversified portfolio of ETFs or mutual funds in a qualified retirement account? You may want to handle this differently. Check your stated allocations.

As a ridiculously simplified example, say your financial plan specifies that you should hold 60% stocks and 40% bonds. Over the several months, your stock allocation rose to 70% as the equity market took off and bond markets slumped.

With the stock market now facing a potentially broad downturn it’s a good time to revisit those allocations, and see if it’s time to move money out of stocks and into bonds. Obviously, there’s more to it, as you’ll need to evaluate exactly what equity and fixed-income asset classes you hold, but a downturn doesn’t mean you blow up your financial plan by selling out your qualified accounts and hope you’ll be able to time re-entry correctly.

So no, the market can’t go up every day. That’s perfectly normal.

A market downturn, rather than necessarily being devastating, offers you opportunity to organize your portfolio. Cut out the dead wood, be sure your allocations are correct and optimize your chances for success when the market inevitably rebounds again.

What tactical changes have you made in your portfolio with the stock market now showing signs of a correction?

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