Stocks fell sharply Thursday, clawing back some of the extraordinary gains that major indexes had made over the summer, as investors shifted out of the large tech-oriented companies that had pushed the market higher in recent weeks. Separately, official data showed that the COVID-19 pandemic continues to sap the economy’s strength, with jobless claims remaining high as August wound down, despite a modest improvement from earlier in the month. The broad S&P 500® Index ended the day 3.5% lower, while the blue-chip Dow Jones Industrial Average lost 2.8% and the tech-focused NASDAQ fell almost 5%.
“The five companies investors generally refer to as ‘Big Tech’—Amazon, Apple, Google/Alphabet, Facebook, and Microsoft—received much of the attention in what has turned out to be the fastest stock market recovery in history,” says Liz Ann Sonders, Schwab’s chief investment strategist. “These companies represent just 1% of the stocks on the S&P 500, but now account for nearly a quarter of the index’s market capitalization. This kind of concentration poses a risk, especially when many of the other stocks on the index aren’t performing nearly as well.”
“At the same time, investor sentiment had become frothy, and today’s decline may not be enough to ease all of that speculative froth,” she adds.
For further evidence of how relying on just a few of stocks to drive a recovery can create vulnerabilities, just look abroad—international stocks outperformed U.S. stocks during the selloff.
“In general, valuations for international stocks have been lower than for U.S. stocks, and international stock performance hasn’t been driven by a handful of stocks, unlike in U.S. markets,” says Jeffrey Kleintop, Schwab’s chief global investment strategist. “Additionally, international stock indexes tend to contain relatively fewer Information Technology stocks, which underperformed, and relatively more Financial Services stocks, which outperformed.”
“International stocks tend to skew more toward cyclical companies than U.S. stocks do,” Jeff says. “This could be a boon if the economic rebound broadens beyond companies that benefit from stay-at-home orders to include other companies.”
What long-term investors can do
1. Resist the urge to react to daily market movements. Selling stocks when markets drop can make temporary losses permanent. Staying the course, while difficult emotionally, may be healthier for your portfolio. This doesn’t mean you should hold on blindly, but we suggest taking into account an investment’s future prospects and the role it plays in your portfolio, rather than being guided by short-term market movements.In practical terms, that means taking a beat and really thinking through why you want to sell an investment. Does the investment no longer fit your strategy—or is fear driving your decision?At the same time, investors should avoid trying to time the market. This rarely works—but it’s especially difficult to try to time the market around unexpected geopolitical events, like COVID-19. Focus on the time horizon for each goal.
2. Make sure your portfolio is consistent with your goals, risk tolerance, and preferences. “When the market is going up and up, it’s easy for investors to think they’re more comfortable with risk than they actually are,” says Mark Riepe, head of the Schwab Center for Financial Research. “Pullbacks have a way of stripping away any illusions on that front.”“That’s why it’s so important—particularly for the new investors out there—to have a plan for the money you’ve invested,” Mark adds. “If you’re saving and investing for a goal that is still many years away, then the best response to sudden drops in the market may be not to do anything.”However, if you’re uncomfortable with market volatility and your goals are short term, you may want to decrease your exposure to riskier assets and move that money to Treasuries or bank certificates of deposit (CDs) to reduce volatility.
3. Rebalance your portfolio as needed. Market changes can skew your allocation from its original target. Over time, assets that have gained in value will account for more of your portfolio, while those that have declined will account for less. Rebalancing means selling positions that have become overweight in relation to the rest of your portfolio, and moving the proceeds to positions that have become underweight. It’s a good idea to review your portfolio for rebalancing opportunities at regular intervals, and is worth considering when markets have been very volatile.“If you are a disciplined longer-term investor that has a diversified strategic asset allocation plan, you could consider more frequent rebalancing tied to how far asset classes have moved relative to [your] longer-term targets,” says Liz Ann.Schwab clients can log in and use the Schwab Portfolio Checkup tool, under the Portfolio Performance tab, to assess whether their portfolios are still in balance with their target asset allocations.
The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The investment strategies mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision.
All expressions of opinion are subject to change without notice in reaction to shifting market or economic conditions. Data contained herein from third party providers is obtained from what are considered reliable sources. However, its accuracy, completeness or reliability cannot be guaranteed.
Past performance is no guarantee of future results and the opinions presented cannot be viewed as an indicator of future performance.
Investing involves risk including loss of principal.
Indexes are unmanaged, do not incur management fees, costs and expenses and cannot be invested in directly. For more information on indexes please see www.schwab.com/indexdefinitions.
All corporate names and market data shown above are for illustrative purposes only and are not a recommendation, offer to sell, or a solicitation of an offer to buy any security.
Diversification, asset allocation and rebalancing strategies do not ensure a profit and do not protect against losses in declining markets. Rebalancing may cause investors to incur transaction costs and, when rebalancing a non-retirement account, taxable events may be created that may affect your tax liability.
Fixed income securities are subject to increased loss of principal during periods of rising interest rates. Fixed-income investments are subject to various other risks including changes in credit quality, market valuations, liquidity, prepayments, early redemption, corporate events, tax ramifications and other factors. Lower rated securities are subject to greater credit risk, default risk, and liquidity risk.
International investments involve additional risks, which include differences in financial accounting standards, currency fluctuations, geopolitical risk, foreign taxes and regulations, and the potential for illiquid markets. Investing in emerging markets may accentuate these risks.
Certificates of deposit are issued by various FDIC-insured institutions, and are subject to change and system access. Certificates of deposit offer a fixed rate of return and are FDIC-insured. There may be costs associated with early redemption and possible market value adjustment.
The Schwab Center for Financial Research is a division of Charles Schwab & Co., Inc.
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