After enjoying a summer of smooth gains, the stock market hit a rocky patch beginning in late July. The road got rougher starting August 1. Then Monday, August 5 delivered the worst decline in U.S. stocks all year.
On August 5 the tech-heavy Nasdaq led the way lower, falling 3.4%. The S&P 500 index lost 3%. All 30 stocks in the Dow Jones Industrial Average declined as the blue-chip index fell 1,034 points. The selloff was a global phenomenon. In fact, it centered much on Japan. On August 5 the Japanese Nikkei 225 index fell 12%, the most in a day since 1987.
Analysts pointed to two broad catalysts behind the global volatility. One catalyst was the unwinding of certain institutional trades, especially trades involving Japanese currency and assets. The other catalyst was weaker than expected U.S. economic data for July. Unemployment rose to a three-year high of 4.3% in July, and the economy added a paltry 114,000 jobs, well below the 175,000 consensus forecast.
How should stock investors respond to turbulence like on August 5? The best course of action may be to not respond at all. Here are some historical stats that offer reassurance:
Volatility is a normal part of the stock investing process. Historically speaking, a 5% drawdown is all but guaranteed (94%) in any given year. Since 1950, the average correction in a given year was -13.7%. Despite that, the average annual return for broad U.S. stocks from 1950-2022 was 11%, and there has not been a 20-year rolling period since 1950 that broad U.S. stocks ended lower than they began.
We believe staying focused on the long run is a key to success (and sanity). Stay true to your unique investing objectives and time horizon, and don’t overreact to short-term noise. Whether the late-summer markets might be smooth or stony, we’re here to stroll their path with you.