History shows that a stock market correction, or worse, is possible.
Breaking News: The stock market is in turmoil. With the stock market at record highs, that may seem hard to believe, but I believe there is trouble brewing beneath the surface.
for example, S&P 500 It has risen about 15% this year, but about 40% of its constituent stocks have fallen since the beginning of the year. NVIDIA and Broadcom Even after subtracting many big losers, the index is still rising. Intel and Lululemon.
But I’m still bullish on the stock market, and here’s why.
Image source: Getty Images.
Reasons for concern
First of all, there are plenty of ominous signs beyond the flat stock market.
A black cat on the floor of the New York Stock Exchange? A crow flying above the Nasdaq? No, the worrying signs I’m seeing are the economic data, which are becoming more worrying by the day.
Consider the relationship between interest rates and stock market corrections. Many believe high interest rates will lead to a correction in stock prices. — or the stock market It will crash.
There is some evidence to support this. But more than high interest rates, the stock market correction The first interest rate cut. That’s because interest rate cuts are often seen as a sign of an economic slowdown or contraction, which could lead to lower corporate profits and falling stock prices.
Target Federal Funds Rate Cap Data by YCharts
The Federal Reserve has not yet started cutting interest rates, but it is In the middleAdditionally, several other central banks, including those in Canada and the European Union, have also begun lowering their benchmark interest rates.
The second warning sign for the stock market is the unemployment rate, which is starting to rise.
US Unemployment Data by YCharts
Not only is this bad news for those who have lost their jobs, but it’s also a sign that the economy is slowing. Moreover, the unemployment rate is rising from multi-decade lows. This could be a serious problem for the stock market, because long periods of ultra-low unemployment are often followed by deep recessions, which can hurt corporate profits and lead to a sharp stock market crash.
Finally, the largest part of the economy, the consumer, is finally showing signs of weakening. For years, robust consumer spending has fueled the U.S. economy, even as high inflation took its toll. But there are now signs that consumers are giving up: Retail sales are sluggish, down in some months from a year ago as consumers cut back on discretionary purchases.
Meanwhile, consumers are increasingly not making their loan payments on time. Credit-card delinquencies are at their highest level in a decade, and auto-loan delinquencies are also soaring. Consumer spending accounts for about 70% of U.S. economic activity, which could be a new warning sign for the stock market.
If the stock market is on the brink of a correction, what is your plan?
All these signs point to a stock market correction. Investors panic. Surely selling it would be wrong.
That’s because economic indicators are not perfect. No model, forecast, or person can perfectly predict the future. For that matter, trying to time the stock market doesn’t work. Peter Lynch once said, “Investors who try to predict corrections have lost far more money than they lost in all of the corrections.”
Even if economic indicators pinpoint when a stock market correction is coming, investors will need to time their re-entry into the stock market precisely.
All of this means that it’s best to stay steady no matter what stage of the economic cycle you’re in. Investors who keep a cool head and stay invested in the stock market not only avoid a lot of stress, but also tend to outperform those who try to time the market, as the power of compound interest gives their investments more time to grow.
For example, during the 2008 financial crisis, the S&P 500 fell by roughly 50% but recovered all of its losses within four years.
^SPX data provided by YCharts
In summary, dark clouds may be gathering, but for long-term investors, that’s to be expected. A stock market correction, or worse, may or may not be on the way. Either way, your best bet is to stick to a steady savings and investment plan, harnessing the power of compound interest.
Jake Lerch has an investment in Lululemon Athletica and Nvidia. The Motley Fool has an investment in and recommends Lululemon Athletica and Nvidia. The Motley Fool recommends Broadcom and Intel and recommends buying January 2025 $45 calls on Intel and selling August 2024 $35 calls on Intel. The Motley Fool has a disclosure policy.
