Jhen it looked like equities were recovering from the January and February decline, the market seems to be back. the Nasdaq Compound (NASDAQ INDEX: ^IXIC) is currently nearly 6% below the March rally and 15% below its recent peak. Indeed, the index is now within reach of the low reached last month after falling 22% from its peak in November. This decision naturally leads many investors to wonder if the most important trend is still bearish.
This of course presents a conundrum; while we generally want to buy good stocks when they break loose, we don’t want to jump in too soon. It’s like catching a falling knife. It’s fine if your timing is perfect, but it’s also an incredibly dangerous business.
Or maybe no one should worry too much about these things in the first place.
Use a visual to take a step back
It is not difficult to pinpoint the main reasons for our current weakness. Inflation has been rampant since the middle of last year, and although the Federal Reserve promises to fight it, the Fed’s key weapon against rising prices is higher interest rates. This has already weighed on the housing market by making borrowing more expensive, but things could get worse on that front before they get better. In the meantime, Russia’s invasion of Ukraine is still ongoing and it has all kinds of negative economic ripple effects. The long-term effects remain difficult to measure. Meanwhile, another variant of the COVID-19 virus has been identified in the UK, proving the resilience of the pandemic to hamper any real return to a level of normality.
No wonder stocks are struggling again.
Beware, however, of drawing long-term conclusions on what will likely only be a short-term headwind. In five years, none of this would matter. In all likelihood, the news details will fade from memory and the Nasdaq will resume its usual upward march.
And don’t get me wrong. Optimism is the long-term norm here.
The image below is a table of Nasdaq Compound — kind of. Rather than a chart of its ever-changing daily value, this staircase chart only goes up or down to reflect changes in value of 20% or more – for better and for worse – since 1984.
There are two takeaways from this. The first is that, as crazy as the past few weeks have been, there is nothing unusual about market movements. In fact, corrections of 20% or more (which are technically bear markets) are actually quite common. We’ve seen a total of 33 since 1986.
The second, more important, is that in any case the Nasdaq has recovered to move to higher highs; in most cases the composite was much higher within weeks.
When it comes to investing, buy the numbers
Nothing changes if you are a numbers person instead of a visual person. Of the 33 major pullbacks the Nasdaq Composite has gone through since the mid-1980s, once the last low was reached, the index averaged a gain of nearly 8% in one month. Three months later, the composite was generally up 13.7%. Six months after the low of the correction, the Nasdaq had rebounded by an average of nearly 20%. Twelve months after the fact, the Nasdaq Composite was generally higher at 26.7%.
There are clear outliers to this trend. Most of them took shape in the 2000s and 2001s when the tech-heavy Nasdaq was bombarded for spiraling out of control in the late 1990s. This bear market ended up be very long lasting, continually suppressing recovery efforts and sending the market even lower. We also saw a crashed recovery effort in 2008, with the composite losing nearly 24% of its value between March 2008 and March 2009. It was then that stocks finally bottomed out, which would mark the pivot to the market longest bull ever.
Statistically speaking, however, it is still more likely than not that stocks will go higher fairly quickly after a crash.
The stumbling block is identifying the ultimate bottom, of course. Maybe it was the March low, and maybe not. We won’t know until much later. Again, however, the odds are more bullish than 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 high to low. A total of 112 days have passed in this 22% decline from the November peak to the March low.
Don’t get distracted from what really matters
Too much to think about? That’s actually a good thing, and it’s along the lines I’m trying to convey – you shouldn’t think too much about this stuff.
While all the data and chart above is interesting, it’s not really what’s driving the market. Trying to precisely time the ebb and flow of the market is child’s play. This cannot be done successfully with any consistency. This is why most short-term traders not only fail to beat the market, but they usually lose money. Short-term volatility seems easy to predict, but in the sense that it’s driven primarily by emotion – and emotion is unpredictable – so is the market.
However, stocks reflect the value of their underlying companies over the long term, which is why the true crowd of buyers and holders tends to do well with stocks. You can bet these people aren’t even considering whether or not now is a good time to buy. They just know that the biggest risk is being completely out of the market rather than being in the market during a temporarily turbulent period.
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James Brumley has no position in any of the stocks mentioned. The Motley Fool recommends the Nasdaq. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.