Reflections on corrections
What history tells us about pullbacks and how to navigate the ups and downs.
FIDELITY VIEWPOINTS – 01/28/2022
Stock markets fall as well as rise, but the trend is up over the long term.
For long-term investors, having a diversified investment plan—and sticking to it through market ups and downs—is better than selling stocks when they drop and locking in short-term losses.
If the market pullback has shifted your target mix of stocks, bonds, and cash, consider rebalancing your portfolio back to your target asset mix. That can help position you for the eventual rebound.
After hitting new highs in January, the S&P 500® Index of large-cap US stocks was briefly down by more than 10% on January 24, driven by a none too tasty cocktail of concerns. Among them: lower corporate earnings expectations, rising inflation and interest rates, the Omicron variant, and a potential war in Ukraine. That 10% drop put the S&P into correction territory, a place it had not been in almost 2 years.
Are we out of the woods yet?
The worst of the market’s decline may be over. Now we could be in a holding pattern.
FIDELITY VIEWPOINTS – 02/02/2022 3 MIN READ
We may have already seen the worst of the market’s recent decline.
Although this near-correction may have seemed sudden, in reality it’s been a rational adjustment to the changing interest-rate outlook.
Valuations such as price-earnings (P/E) ratios have already come down significantly since the market’s early-January peak.
While valuations may have further to fall, the remainder of the compression may happen gradually via earnings growth (instead of suddenly via further price declines).
In this environment, investors could consider low-volatility, high-quality dividend-paying stocks such as utilities.
It’s been quite a few weeks, to say the least. My strong sense is that the worst is behind us in terms of the market’s decline, but that it may take some time before we revisit its recent highs. Let’s dig in.