(NEW YORK) — A year of sharp declines for the stock market reversed over the summer, giving stocks a much-needed rebound. But a bout of deep losses across the major stock indices in recent weeks has renewed fears of further decline.
The S&P 500 on Monday closed at a lower point than it has on any other day of 2022. The Dow Jones Industrial Average, meanwhile, fell officially into bear market territory, meaning it had dropped at least 20% from its most recent peak.
The recent drop marks the latest swing of this year’s market seesaw. Bouncing back from a historic plunge over the first half of 2022, the S&P 500 rose more than 15% during a two-month period beginning in mid-June. Over that same period, the tech-heavy Nasdaq spiked more than 17% and the Dow rose nearly 14%.
In recent weeks, the stock market has soured, however, over indication from the Federal Reserve that it intends to continue an aggressive series of borrowing cost hikes until it brings inflation under control — a policy approach that heightens the risk of tipping the U.S. economy into a recession, market analysts told ABC News.
Still, investors and retirees shouldn’t sell their stock holdings in a panic. In fact, some investors should buy additional shares, anticipating that low-priced stocks will eventually recover and yield significant gains, the analysts said.
“Recessions, as painful as they are, ultimately lead to discounted prices,” Dan Ives, managing director and senior equity research analyst at Wedbush Securities, told ABC News. “Investors that can navigate that risk could be rewarded on the other side of the dark storm.”
Here’s what you need to know about why stocks are falling, how much further the decline could go and what investors and retirees should do in response:
Why are stocks falling?
Stocks are falling because the Fed has put forward a string of aggressive interest rate hikes in recent months.
The policy approach aims to slash price increases by slowing the economy and choking off demand. But the move risks tipping the U.S. into a recession and putting millions out of work.
A recession poses a serious threat to the stock market because it could dramatically cut corporate profits, the key focus for stock forecasters. As workers lose their jobs and consumers cut back on spending, business gains dry up.
“The main reason stocks remain vulnerable in recessionary environments is that corporate profitability is affected,” Christine Benz, the director of personal finance at financial research firm Morningstar, told ABC News. “That makes prevailing stock prices harder to justify if corporate profitability is sinking.”
Typically, the market has climbed in response to news about slowing inflation and a potential softening of rate increases; inflation spikes and rate moves are a common cause of selloffs.
Inflation data released earlier this month revealed that prices rose unexpectedly in August, sending the market tumbling. Last week, the Federal Reserve instituted a 0.75% rate hike, which sent stocks falling even further.
How far will the stock market fall?
It’s difficult to predict the specific length of a market slide, the analysts said. But history suggests the downturn could last for several more months and possibly more than a year and that stock prices may fall even further.
Keith Lerner, co-CIO and chief market strategist for Truist Advisory Services, said the rate hikes instituted by the Fed would weigh on the economy for at least 6 to 12 months and potentially even longer.
“Even if the Fed changes course, the rate increases they’ve just done this year haven’t had their full impact,” Lerner told ABC News. “With that backdrop, we think it will continue to be a volatile market and the economy will be weakened.”
If the U.S. falls into a recession, those losses could be even more pronounced, Lerner added.
Since 1950, the average decline for the S&P 500 during a recession is about 29%, he said. So far this year, the S&P 500 has fallen nearly 24%.
“The market is pricing a mild recession into stocks,” said Ives of Wedbush Securities.
The plummet in the S&P 500 this year qualifies it for bear market territory, which offers another lens for assessing the index’s historical performance.
In the 26 bear markets since 1929, the S&P 500 has lost an average of 35.6% of its value over a typical duration of 289 days or about 9-and-a-half months, according to a report from Hartford Funds.
What should investors and retirees do?
Investors, including those nearing or in retirement, shouldn’t sell their stock holdings out of panic, the experts said.
“Often when you make changes in response to the market activity, you find that the market recovers not long thereafter,” said Benz. “My advice is for investors to have long-term strategic asset allocation that makes sense for them and stick with it.”
Take, for instance, a 45-year-old investor with a portfolio made up of 70% stocks and 30% bonds, Benz said. The declining value of the stock market may send the balance awry, shrinking the share made up of stocks and raising the share made up of bonds.
Such an individual should buy more stock holdings in an effort to bring the proportions back into alignment with the initial portfolio balance, she added.
“It doesn’t feel great – you’re adding to the asset class that hasn’t performed well,” Benz said. “The virtue of the strategy is that it enforces discipline for this idea of putting money into the market when stocks are down and arguably cheaper.”
Added Lerner: “The price of admission in the stock market are drawdowns. There are drawdowns every year – some are bigger than others.”
For investors nearing or in retirement, the choice is more difficult, since they may lack the long-term time horizon of younger investors. The economic headwinds this year have hurt bonds, a popular safe haven for retiree portfolios.
“This has been a really tough year for those in that age band,” Benz said.
She advised pulling out some cash reserves but also urged individuals against overdoing this strategy, especially in a high-inflation environment. People should cash out the “least-depressed assets” in their portfolio, such as short-term bonds or high-quality intermediate bonds, she added.
Retirees could also benefit from placing their money in savings accounts, which tend to offer higher interest rates as the Fed heightens borrowing costs, Benz said. Elevated yields on savings accounts, however, still remain well below the inflation rate.
“Shop around for savings accounts, because there is a huge disparity in terms of yields,” she said.
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