Already, 2022 has been quite the roller-coaster ride. Mounting concerns about inflation, future Federal Reserve interest rate increases, and the persistence of the coronavirus is creating a lot of turbulence in the stock market. Briefly, on Monday, Jan. 24, the Standard & Poor's 500 Index fell into correction territory, dropping more than 10% from recent highs. Fortunately, markets rebounded that day, with the S&P closing down just over 7%. But there is still a lot of uncertainty in the markets and the S&P has flirted a couple of times since then with breaching the correction threshold.
The Nasdaq Composite, at the time of this writing, is down about 10% year to date. Market volatility and dips aren't fun, but they shouldn't be feared. Here's why I'm not worried about the market dip, and you shouldn't be either.
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The stock market has performed incredibly well in recent years
The stock market hasn't just rallied since March 2020's pandemic-induced market crash -- it's soared. In early January 2022, the S&P 500 did something it hasn't done in more than 20 years: It doubled in just a three-year span. Over the past 10 years, including the 2020 market correction, the S&P 500 provided a 269% total return and a 205% price gain. The Nasdaq, meanwhile, achieved a 410% total return over the past 10 years, with a 349% gain, and the Dow Jones Industrial Index saw a 224% return with a 162% level increase -- testaments to the power of time in the market.
A market dip, or even an actual correction, would still mean investors who have been in the stock market for the past few years would be sitting at all-time highs when it comes to returns. Newer investors who may have recently purchased shares at or near market highs may suffer a temporary loss during a market dip, but given enough time, the market will recover, as history has shown.
A market dip is a great time to buy quality stocks
Entering 2022, the market was richly valued, making it challenging to find worthwhile investments. A market dip presents an opportunity to double down on existing investments or diversify your portfolio while picking up new high-quality stocks at a discount to recent prices. There are a ton of great stocks out there that are under pricing pressure despite maintaining a steady performance. Market dips just make the purchase more sustainable for investors.
Investor sentiment remains steady
The CBOE Volatility Index (VIX), which measures volatility and investor sentiment, is sitting above 30. The higher the VIX index, the more likely investors will panic sell during a market dip. While today's numbers are higher than in the recent past, they're nowhere near March 2020 levels, which at one point spiked above 80.
Keep calm
Fed actions could change investor sentiment in either direction, meaning the index is definitely something to watch carefully. However, right now, things appear to have stabilized a bit.
Investors need to keep cool during times of turbulence. Market retreats and corrections happen. We may not know when the market will rebound, but eventually, it will recover. Continue investing with the long term in mind and ride through the discomfort and tension of today's volatile market. While it may not be easy, it will definitely be worth it.
