2022's market correction shouldn't be cause for alarm

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Following two years of an extraordinary bull market, Q1 2022 spooked investors as the market opened the year with an immediate market correction. This has caused concern among investors and has induced some “experts” to predict further drops or even an extended bear market. A market correction is just as the name implies, a 10-20% drop in stock prices that occurs when a bull market has gotten ahead of itself. If losses begin to creep above 20%, we are no longer in a correction – we are entering a bear market. We have seen this script play out many times before, and each one has its own particular nuances that make it unique. Every market decline is unique, yet not something that requires a complete change in one’s overall investment strategy.

Investors are human beings with many fears and desires that influence their overall investment decisions. Many times, these decisions are driven by a prolonged sense of what is “normal.” For instance, during the technology crash of 2000-2002, the Nasdaq dropped approximately 80% over three years. Investors generally believed that the negative returns would continue into the future. Conversely, during the past three years (January 1, 2019 – December 31, 2021), the S&P 500 had cumulatively gained 100%. The two time periods are obviously significantly different. Nonetheless, overall investor sentiment for both time periods was similar.  Investors feared that the market would drop. Why would investors be concerned that markets could continue to fall in both scenarios?