Reacting to a Stock Market Decline

S&P 500 Index Declines

The last month has been a rough one for the stock market. The S&P 500 index of large US stocks has fallen by more than 7% in the last four weeks (as of the end of the day on October 16th), and many international stock markets have fared even worse. Such a sizable decline can be painful, especially since stocks in general have done so well since the end of the global financial crisis in 2009. But sticking to your long-term strategy, rather than panicking and trying to change things up in response, is (as usual) probably the right way to react.

Put in a broader historical context, it’s clear that the recent market decline isn’t too unusual. In fact it’s rare when there’s a year when the stock market doesn’t fall at least 7% in a four-week period. Such a decline occurred for the S&P 500 index in 2012, multiple times in 2011 (remember the debt ceiling crisis?), multiple times in 2010, and multiple times in 2009.

Panicking during any of these declines may have seemed reasonable at the time, but reducing your exposure to the stock market would have resulted in missing out on some of the gains during the bull market that’s lasted more than 5 years. Even after its recent decline the S&P 500 index is more than 170% above its March 2009 low.

That’s not to say that markets always surge following a moderate decline: in 2007 (shortly before the worst of the financial crisis) and in the late 1990’s (shortly before the bursting of the tech bubble), stocks continued to fall for an extended period of time rather than bouncing back up. But the overall historical record suggests that a moderate drop in the stock market is not a good reason to panic.