What History Shows Us About Market Downturns

Everything isn’t always peachy keen in the stock market. History has shown us that volatility and market downturns are inevitable. However, as an investor, this doesn’t mean panicking and losing track of your long-term goals. If anything, it can be a chance to get closer to your financial goals — especially if time is on your side.

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History tends to repeat itself

From 2000 to 2020, the stock market saw three major crashes that sent investors into a panic. In March of 2000, the tech (dot-com) bubble burst. On March 10, the Nasdaq Composite index peaked, breaking 5,000 for the first time ever at that time — up from around 1,000 in 1995 and more than double from 1999. From there, it went all downhill, with the NASDAQ losing close to $1 trillion in value in less than a month. As of May 20, 2022, it’s above 11,000, even after dropping from 16,000 in November 2021.

From 2007 to 2009, we witnessed the financial crisis unfold and spark the Great Recession. It was triggered by a collapse in the housing bubble and ended up being the worst financial collapse since the Great Depression. On September 29, 2008, the Dow Jones Industrial Average (DJIA) fell by more than 777 points, the largest point drop ever at the time. The DJIA now sits above four times its 2009 lows.

The COVID-19 pandemic happened in 2020, causing a crash we hadn’t witnessed since the financial crisis. On February 14, 2020, the S&P 500 was over 3,380, and by March 20, 2020, it had dropped to just over 2,300 points. As of May 20, 2022, it’s now over 3,830, even after being down briefly by 20% year to date.

Although past events don’t guarantee anything about future events, history tends to repeat itself, and the stock market has shown us time after time that it has the ability to rebound and bounce back from crashes and huge downturns. The current happenings of the stock market may make people anxious because they’re seeing their portfolio drop, but it’s nowhere near time to panic.

Use market downturns to your advantage

One of the best things to come from market downturns is the ability to buy fundamentally great stocks at much cheaper prices. If you’re investing for the long term and buying great companies and funds, sell-offs shouldn’t bother you — they should make you opportunistic. If you’re a believer in a company at $200 a share, seeing it at $100 can be lucrative. It’s a chance to lower your cost basis and increase potential profits when you sell it in the future.

Of course, it’s not always the case that particular stocks rebound, but blue chip stocks have shown that they’re great businesses and have stood the test of time by making it through some of the worst economic conditions the U.S. has experienced. Long-term investors should be focused on one thing: the long term. Short-term price movements shouldn’t make you anxious if you’re decades away from retirement.

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