In the wake of the recent market pullback, investors can take heart from viewing the market from a long-term perspective. While the current situation can feel like a major upheaval, the past can provide some valuable insight into what the future may hold.
The most important aspect to remember when viewing market pullbacks is that these downturns are unavoidable. It’s completely normal to experience periods of decline even in good economic times, and periods of growth in recessions. In fact, these downturns are even considered healthy, as they often pave the way for stronger and more sustainable market growth.
By looking at recent historical patterns, investors can gain insight into what they can expect in the future. For example, an analysis of the Dow Jones Industrial Average’s (DJIA) long-term performance reveals that the index has recovered from a 22.6 percent decline in August 2015 to a 6.8 percent rise in December of the same year. Similarly, the NASDAQ Composite has recovered from its March 2019 pullback of 7.1 percent to a nearly 11 percent gain in the following months.
These examples demonstrate that the market is often able to quickly bounce back from declines. Of course, the danger comes from when a pullback rapidly turns into a prolonged wait for the market to reach its previous highs. Unfortunately, it is generally impossible to predict when such an event may occur – like during the financial crisis of 2008 – and investors would be wise to follow their predetermined strategies.
It is also important to remember that markets fluctuate with geopolitical events, and the effects of those events are often unpredictable. As such, investors should keep an eye on the news and look for signs of an upcoming recession, such as a rise in unemployment rates, or a drop in consumer spending.
Ultimately, the key is to remain calm in the face of a market pullback. While the temptation to sell everything or dive in may be very strong, a long-term perspective can reveal that these reactions are often ill-advised. Taking some time to review the performance of the market over a prolonged period of time may help investors make more appropriate decisions regarding the health of their portfolios.
