May is shaping up to be a pretty bad month in the stock market. After coming off a tough April and the worst daily performance from the Nasdaq since 2020, there are rumblings of a bear market for the S&P 500, which is when the market drops 20% from a high. If that’s the case, the S&P 500 will join the Nasdaq in bear market territory.
The Consumer Price Index (CPI), which tracks consumer prices, showed inflation rates are starting to cool, but not as much as investors hoped. The Federal Reserve is doing all it can to fight rising costs, and stocks are bearing the brunt of the losses. Tech stocks are finding their valuations level off, including Apple, Google, and Microsoft, as stocks slide for the sixth week in a row, despite modest rallies in Friday’s session. News that Elon Musk may be reconsidering his offer to buy Twitter is causing that company’s stock to drop, too.
But all this news shouldn’t rattle investors. With a long-term plan, keep dollar-cost averaging your investments to preserve your spending power in market downturns.
The crypto market is seeing big losses, as well. So far, over $200 billion has been erased from the crypto market. Bitcoin and ethereum are down over 20% this past week. Bitcoin dropped below $26,000 Thursday — its lowest level in six months. Ethereum followed bitcoin’s lead, with its price trading below $2,000 Thursday.
Here’s more on the biggest stock market news this week and what it means for investors:
- The S&P 500 has fallen over 19% since the beginning of the year, but we’re likely far from the bottom, according to Bank of America analysts, who say the market could still fall another 28% by October. A 20% fall from a recent peak is the widely used definition of a bear market, and we’re getting close to that metric based on January’s high. Linda García, founder of In Luz We Trust, says “we’ll probably see a bear market.” She also says it would be an opportunity to “remove all the games and start fresh” with an economic reset. For investors, now is the time to steady your resolve and keep investing, despite whatever happens. Investor sentiment is fragile now and we’re seeing major selloffs, but dips are part of the journey. It’s important to keep your emotions in check during times like this.
- The Federal Reserve will likely keep raising interest rates throughout the year to tame inflation. Increasing interest rates slows the overall economy by forcing employers to cut back on borrowing. Fed Chairman Jerome Powell doesn’t foresee a recession though, based on a tight job market and healthy consumer spending. Still, investors are watching the Fed’s moves closely because they’re intrinsically tied to the stock market at this point. Many experts believe higher interest rates have already been priced into stock prices, but investors are jittery after the worst start to the stock market since 1939.
- As of this week, Apple is no longer the most valuable company in the world. The company is now valued at $2.37 trillion, second to oil giant Saudi Aramco. And Twitter, which recently accepted Elon Musk’s offer to buy the company, saw its stock decline 13% this week, putting a $9 billion gap between the $44 billion offer price and current worth. Musk tweeted that the deal is “on hold” until he can verify the number of spam and fake accounts, which sent Twitter stock tumbling even more. Because Musk is associated with Tesla, “any decisions he makes with Twitter could hurt Tesla shares,” García says. Whether the deal will close is anyone’s guess, but it’s a good reminder to think about investing in index funds, which provide immediate diversification against any one company or sector dragging down your entire portfolio.
- This week will likely extend a six-week losing streak for the stock market despite picking up a little on Friday – and crypto isn’t doing so well, either. Although not usually correlated to stocks, we’re seeing the two rise and fall in similar patterns, with crypto being notoriously volatile. García says, “I don’t see crypto being used in the way it was intended to be used – as currency. I see it more like an investment. So it makes perfect sense” that it’s intertwined with the stock market. Coinbase, a popular crypto exchange service, is warning users that if the company goes bankrupt, it could take investors’ funds, although Coinbase CEO Brian Armstrong says that won’t happen any time soon. While it may be the wave of the future, experts recommend allotting a maximum of 5% of your overall investments to speculative investments, including crypto.
The stock market’s performance changes every day in response to a variety of events, both nationally and globally. Investors, and therefore stock prices, respond quickly to news, and there’s a lot going on.
We’re also still seeing supply chain impacts from the pandemic in Asia, while consumer demand rises. That’s driving up prices for basics like energy and food. As inflation increases, the Federal Reserve wants to keep it under control, but investors are worried it might tighten too much and lead to a recession. Expect investors – and stock prices – to react accordingly, as there are still potentially hundreds more basis points to go this year.
García acknowledges that it’s a tough time for new investors. “I’m centered and understand I need to hold for the long term, and continue with being disciplined and putting money into the market. I cannot imagine what it must be like to be a brand new investor that just came in,” she says. That’s why it’s so important to remember your long-term plans right now, and resist the urge to sell your investments at a loss.
The market looks forward and reacts quickly. As an investor, you should look forward, too – but instead of reacting, the best response is to stay the course and keep investing.
How Investors Should Deal With Stock Market Volatility
For new investors, big swings in the market can be a lot to handle. There’s a lot of uncertainty right now because of interest rate hikes, increasing real estate prices, and everyday commodities getting more expensive because of inflation — and the market reflects that on a day-to-day basis.
But if you have a buy-and-hold strategy with low-cost, broad-market index funds, remember that slow and steady wins the race. The best performing portfolios are ones that have the most time in the market.
Pro Tip
Even — and especially — when there’s volatility in the stock market, the best course of action is to be aware, but stick to your investing plans. It’s impossible to time the market, and historically speaking, it’s always recovered. Stay the course through the dips and peaks, and remember why you’re investing.
“The most important thing is to always remember what you’re investing for,” says Thomas Muñoz, financial life advisor at Telemus, a financial advisory firm. “Short-term volatility is obviously something people should be aware of. But if you have a long-term time horizon, historically the stock market goes up. And when that’s the case, it’s important to have the discipline to keep dollar-cost averaging your [investments].”
Dollar cost averaging spreads out your deposits over time, and has demonstrated that it performs better “during a period of high market crashes,” according to Rebecka Zavaleta, creator of the investing community First Milli.
Whatever you do, invest early and often, especially if you have a long investment timeline. Dips and crashes will happen, and so will other scary-sounding things like economic bubbles, bear markets, corrections, death crosses, and recessions.
You can even take advantage of a dip to invest more, but not if it impacts your regular investing schedule, Muñoz advises. It’s hard to tell when there’s going to be a dip or correction, and “not even the best investors in history can time the market.” The best advice is to stick to your plan and keep investing.
