Just when it looked like stocks were recovering from January and February's pullback, the market seems to be at it again. The Nasdaq Composite (NASDAQINDEX: ^IXIC) currently sits nearly 6% under March's rebound high and 15% below its recent peak. Indeed, the index is now within reach of the low hit last month after falling 22% from its November high. The move understandably has many investors wondering if the bigger trend is still a bearish one.
This of course presents a conundrum; while we generally want to buy good stocks when they peel back, we don't want to step in too soon. It's tantamount to catching a falling knife. It's fine if your timing is perfect, but it's also an incredibly dangerous endeavor.
Or, maybe nobody should be worrying too much about these things in the first place.
Using a visual to gain some perspective
It's not tough to spot the key reasons for our current weakness. Inflation's been rampant since the middle of last year, and while the Federal Reserve is promising to fight it, the Fed's key weapon against higher prices is higher interest rates. It's already taken a toll on the housing market by making it more expensive to borrow, yet things could get much worse on this front before they get better. In the meantime, Russia's invasion of Ukraine is still underway and it's having all sorts of negative economic ripple effects. The long-term effects remain difficult to gauge. Meanwhile, yet another variant of the COVID-19 virus has been identified in the U.K. proving the resilience of the pandemic to hamper any true return to a level of normalcy.
It's no wonder stocks are struggling again.
Be wary of jumping to any long-term conclusions about what will likely only be a short-term headwind, though. Five years from now, none of this could matter. In all likelihood, the details of current events will be fade from memory and the Nasdaq will resume its usual trek higher.
And make no mistake. Bullishness is the long-term norm here.
The image below is a chart of the Nasdaq Composite — sort of. Rather than a plot of its ever-changing daily value, this stair-step chart only rises or falls to reflect value changes of 20% or more — for better and worse — going back to 1984.
There are two clear takeaways from this. The first is that, as wild as the past few weeks have been, there's nothing all that unusual about the market's moves. In fact, corrections of 20% or more (which are technically bear markets) are actually pretty common. We've seen a total of 33 of them since 1986.
The second, bigger takeaway is, in every case the Nasdaq recovered to move on to higher highs; in most cases, the composite was much higher within a matter of weeks.
When it comes to investing, buy the numbers
Nothing changes if you're a numbers person instead of a visual person. Of the 33 major pullbacks the Nasdaq Composite has been through since the mid-1980s, once the final low was made, the index averaged a gain of nearly 8% within a month. Three months later, the composite was typically up 13.7%. Six months following the correction's low, the Nasdaq had rallied an average of almost 20%. Twelve months after the fact, the Nasdaq Composite was typically higher to the tune of 26.7%.
There are clear outliers to this trend. Most of them took shape in the years 2000 and 2001 when the tech-heavy Nasdaq was getting shellacked for spinning out of control through the late-1990s. That bear market ended up being a very long-lived one, continually quelling recovery efforts and sending the market even lower. We also saw one recovery effort squashed in 2008, with the composite losing nearly 24% of its value between March 2008 and March 2009. That's when stocks finally hit the bottom that would mark the pivot into the longest-lived bull market on record.
Statistically speaking, though, it's still more likely than not that stocks will be higher fairly soon after a meltdown.
The stumbling block is identifying the ultimate bottom, of course. Maybe March's low was it, and maybe it wasn't. We won't know until well after the fact. Again, though, the odds favor being bullish rather than being bearish here. The average major market correction since 1986 is just under 90 calendar days, and drags the Nasdaq an average of 25% lower from higher to low. A total of 112 days passed in this 22% drop from November's peak to March's trough.
Don't be distracted from what really matters
Too much to think about? That's actually a good thing, and it goes to the point I'm trying to make — you shouldn't really be thinking about this sort of stuff too much at all.
While all the data and the above chart is interesting, it's not really what drives the market. Trying to precisely time the market's ebbs and flows is a sucker's game. It can't be done successfully with any consistency. That's why most short-term traders not only fail to beat the market, they typically lose money. The short-term volatility looks easy to predict, but in that it's mostly emotion-driven — and emotions are unpredictable — so, too, is the market.
Stocks do reflect their underlying companies' value in the long run, though, which is why the true buy-and-hold crowd tends to do well with stocks. You can bet these people aren't even thinking about whether or not right now is a good time to buy. They just know that the bigger risk is being out of the market altogether than being in the market during a temporarily turbulent time.
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James Brumley has no position in any of the stocks mentioned. The Motley Fool recommends Nasdaq. The Motley Fool has a disclosure policy.