3 Reasons Not to Worry About a Stock Market Crash | Personal-finance

(James Brumley)

The S&P 500 (SNPINDEX: ^GSPC) is currently down 17% from its early January high. And from peak to trough, the index has actually fallen more than 20%, technically qualifying the pullback as a full-blown bear market. That’s a lot of loss for stocks to absorb in less than five months. Perhaps worse, depending on the day — and that day’s headlines — the market feels like it could still move even lower.

The thing is, even if there’s more selling in our near-term future, it’s not a reason to worry. A reason to adjust and reassess your portfolio? Probably. But worry? There’s no need; worrying doesn’t change the outcome anyway.

With that as the backdrop, here are the top three reasons a stock market crash shouldn’t stress you out, even if it feels stressful at the time.

1. Not all crashes are reflections of the economy’s condition

Not all bear markets are the result of economic weakness that’s apt to linger. Sometimes they just reflect panic that will end up being short-lived.

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Economic weakness was certainly the case in 2008, in the wake of the subprime mortgage meltdown that infected other facets of the economy. It wasn’t the case in March 2020, though, when stocks were tanking after COVID-19 made landfall in the United States. While the economy did suffer then, it wasn’t due to cyclical weakness. The struggle stemmed from logistics challenges linked to shutdowns.

The economy was doing fine before the pandemic took hold, and strangely enough, in some ways it even benefited from the contagion. To this end, it only took the S&P 500 about five months to recover the 33% setback it suffered in that one ill-fated month, and it ended up nearly doubling its March 2020 low by late last year. Clearly the economy wasn’t broken then.

Sure, it’s possible the current market weakness is correctly predicting economic weakness. The first quarter’s gross domestic product (GDP), for instance, contracted to the tune of 1.4%.

Read the fine print the Bureau of Economic Analysis added to its initial GDP report, though. It explains how many “government assistance payments in the form of forgivable loans to businesses, grants to state and local governments, and social benefits to households all decreased as provisions of several federal programs expired or tapered off,” and that “the full economic effects of the COVID-19 pandemic cannot be quantified in the GDP estimate.”

In other words, even though many investors are doing so, don’t read too much into Q1’s estimated GDP figure. Other economic measures, like the Fed’s industrial production index and retail sales, are still showing net growth.

2. They’re buying opportunities

Many investors are often so consumed by the rhetoric surrounding sharp sell-offs that they forget to do the one thing you really want to do when stocks are down… buy them.

This doesn’t necessarily mean you should indiscriminately buy any name on any day the market’s in the red. In fact, you should probably resist the temptation to buy most beaten-down stocks simply because they’re cheap at the time. As I explained just earlier this week, if you weren’t interested in owning Cisco five months ago because you have no interest in the networking technology industry, cheaper Cisco shares are still just exposure to the same slow-growth industry. A discount only matters if you want what’s on sale.

Image source: Getty Images.

For the long-term names you regret not buying in 2008 — or even in early 2020 — though, here’s your chance to step into them while they’re on sale.

And make no mistake — the market’s thrown the proverbial baby out with the bathwater, driving almost all stocks markedly lower with little thought as to whether or not they deserved such treatment. Even shares of venerable, proven blue-chips like Ford, Nvidiaand Amazon are all down more than 40% from recent peaks, with investors simply shedding risk any way they can. That’s a big mistake, if you can see the bigger picture.

3. We’ve recovered from all the previous ones

Finally, know that exactly zero of the planet’s past recessions have damaged the global economy beyond repair. Even if a market crash is a precursor to prolonged trouble this time around, we’ll move past it like we always do.

Combining a couple of data nuggets might help you become more comfortable with the idea. One of these tidbits is the fact that since the great crash of 1929, the market has experienced a total of 12 more crashes that more than easily qualify as bear markets, with dozens of blips, corrections, and pullbacks during the same timeframe. The other data nugget? Despite these stumbling blocks, the S&P 500 is still up more than 23,000% during this stretch, reaching yet another record high at the very beginning of this year.

Not that you’ll be an investor for nearly a century, but you have to appreciate your odds and potential returns even with the occasional, barrowing sell-off.

Here’s another comforting thought that will make a crash — or a continued crash — a little less worrying: Although the precise numbers vary from one source to the next, most research indicates that stocks usually recover from a bear market within one to two years after making its ultimate bottom. Granted, it can take an average of nearly a year to hit that bottom. Given how quickly we’ve seen stocks fall this time around, though, it’s not exactly a stretch to suggest the current sell-off’s timeframe has been accelerated.

Of course, you need to Foolishly see your investments through at least a five-year lens for this to be of any comfort. You are thinking in such a timeframe, right?

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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. James Brumley has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Amazon, Cisco Systems, and Nvidia. The Motley Fool has a disclosure policy.

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