Investors may be feeling a bit unsettled after a few days of market turmoil upset months of tranquility.
A slide that started early last week led to a sharp dive in markets Friday and Monday. The fall on Monday alone represented the steepest drop in 6 1/2 years. That can rattle a few nerves. Things seemed to have stabilized Tuesday, easing fears of a global sell off.
Market professionals say investors should stay calm – although they can’t guarantee markets will do the same.
So what should you do? Here are a few answers to common questions:
What just happened?
No one thing triggered this.
The markets took a marked turn downward Friday after the monthly U.S. jobs report showed that wages surged in January, representing the sharpest year-over-year gain since the recession. That stoked concerns about higher inflation because as companies raise pay, they often raise prices and that cycle can speed inflation.
The Federal Reserve is already expected to raise short-term interest rates this year with the economy growing. But inflation worries raise concerns that the Fed will increase rates at a quicker pace. Higher borrowing rates can be a challenge for corporations over time as they want to borrow money to grow and it drives investors to bonds rather than stocks.
The selling continued Monday, in what most experts are saying is just an overdue correction. Some believe automated trading also played a role as the systems that buy and sell stocks may have been triggered. Trading was choppy Tuesday but the U.S. market recovered after an early plunge.
How bad was it?
Not that bad, really.
That big two-day drop only erases a few months of gains. Plus, market pros have noted that declines of 10 percent or more are common during bull markets. And this has been the second-longest bull market on record.
There hasn’t been a correction in two years, and by many measures, stocks are awfully expensive.
“Market corrections are normal, no matter how nerve-wracking they are at the time,” said Greg McBride, chief financial analyst at Bankrate.
And after an extended period of market calm, it serves as a good reminder that stocks are volatile.
What should I do?
The answer can be one of the toughest parts of investing: Stay calm.
“Just hang in there, maintain a long-term perspective and resist the urge for any knee-jerk reactions,” McBride said.
Stocks go up and down – that is the nature of the market.
People should be making their investments as part of a long-term plan, one that won’t be entirely hijacked by a few days of losses. And there may even be more volatility ahead – there’s no way to be sure.
Check in with your financial planner or investment firm if you are feeling uneasy. It may be a good time to look at your portfolio and make sure it has a mix of assets that you are comfortable with. After the market’s big run-up, you may have more of your portfolio weighted toward stocks than you realize.
Vanguard said that it counsels customers that changes to their portfolio should be made because their life circumstances, or their time horizon, have changed – not because of inflammatory headlines or “noise.”
Some people may want to take advantage of the dip to buy. Others may want to revisit their strategy. But those who want to get out of the stock market altogether should take pause, said Ken Hevert, senior vice president for retirement at Fidelity Investments.
It’s easy to get out during down times but hard to get back in for a recovery. And drops of 5 percent to 10 percent are typically followed by a pretty rapid recovery period, he said, adding that current conditions are favorable for growth.
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