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StonebridgeMARKETS | 3 Things to Keep in Mind When the Market Drops

2021 was one of the best years in the history of the stock market. While the S&P 500’s nearly 30% return is not the highest, last year was marked by historically low volatility. The worst down day in the market last year was a loss of just 2.6%. There were also more all-time highs in 2021 than the combined 20 years of the 1970s and 2000s[i]. 2021 is about as good as it gets.

It’s important to remember that successful investing demands a price. Its currency isn’t in dollars and cents, but volatility, fear, doubt, uncertainty, and regret. All of these are easy to overlook until you’re dealing with them in real time. In 2021, it certainly didn’t feel like we were paying a price for the “easy” investing. We’re certainly paying that price in 2022.

To start the year, the S&P 500 is down nearly 10% with technology companies, meme stocks, and crypto all getting hammered. You can blame the Fed, or inflation, or geopolitical tensions with Russia. But none of those reasons really matter. When the market gets spooked, for whatever reason, it sells off. Don’t be the market. Instead, be like Warren Buffett who “likes to be greedy when others are fearful.” Buffett knows how quickly mood can switch from fear and despondency to exuberant optimism.

As a refresher, a market correction is when the market drops 10% from the most recent high and a bear market is when the market drops 20% from the most recent high. Here are three things to keep in mind when markets are dropping:

1. This is normal. The market, just like the weather, has seasons. There are periods when markets do exceptionally well (spring and summer), periods when markets produce small returns (autumn), and periods when markets decline (winter). Typically, market “winters” come in three variations:

  • Mild, 10+% drop, historically occurring every other year.[ii]
  • Major, 20+% drop, historically occurring every four years.[ii]
  • Severe, 30+% drop, historically occurring every seven years.[ii]

Keeping with the weather analogy, the market can also experience unseasonable cold fronts, or corrections, that pop up when everything surrounding the market appears to be on solid footing. Bear markets and corrections are normal. While they are uncomfortable in the short-term, they historically last for about 9.6 months (time to full recovery) and result in healthier market conditions.[iii]

2. This is healthy. There is a reason that trees don’t grow to the sky. There’s a reason why a field must be tilled before the next harvest. Bear markets and corrections weed out speculation and help return the market to normalized valuations.

Interestingly, bear markets have become less frequent since World War II. Prior to the war, the stock market would experience a bear market every 1.2 years. Since 1945, bear markets have only occurred every 5.4 years.[iii] There are lots of potential reasons for this: Fed intervention, an interconnected global economy, increased regulation, etc. More important is that market cycles play a vital role in maintaining a healthy market and economy.

If you panic and move into cash during a correction, you may well be doing so right before the market rebounds.

3. This is an opportunity. A common quip around the office is that “the market is the only place where there is a sale, and nobody buys.” You’re likely to check out a sale at your favorite retailer or see what deals are happening on Black Friday. But for some reason, when markets offer a discount, investors run.

Since 1926, the direction of the stock market has been up, albeit with some bumps along the way. But it’s probably safe to assume that markets will continue to march higher after navigating this most recent setback. The market doesn’t give out many discounts. Take them when they come.

Do you know the distance between NYC and LA? Approximately 177 million inches. As ridiculous as it sounds to use inches to measure a long journey, this is what people do every day. They watch financial or social media and worry. They are measuring their journey in inches instead of miles. Participating in the market means navigating periods of volatility, especially when you least expect it. Measure in miles. Maintain the long-term view.

At Stonebridge, we know that our disciplined, achievement-based approach can weather the winters and help eliminate the distractions in your financial journey. Should you have any questions or concerns, please don’t hesitate to reach out to your Stonebridge team.


[i] Source: 2021 Was One of the Best Years in the Stock Market History
[ii] Source: Ibbotson.
[iii] Source: 10 Things You Should Know About Bear Markets

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