When a full-on downturn in the market occurs, it won’t come with a whole lot of fanfare — at least not at the beginning. It will likely start slowly and build momentum. Unfortunately, that’s also the reason why market downturns are so difficult to prepare for or even to predict.
While it’s not possible to predict a downturn, there are seven outcomes you can expect will happen upon its arrival. They might even play out sequentially, as the downturn deepens.
1. You Will Lose Money
News media accounts of the downturn in the market are confusing. But there’s no mistaking the evidence that will show up in your portfolio. When a downturn occurs, you will lose money, and it will be the most conclusive evidence that it has arrived.
As well, most other people will lose money too, though they may be reluctant to talk about it publicly.
In a way, this is an unfortunate validator of a downturn in the market. Most people don’t give serious consideration to a stock market reversal until it actually takes root. But by then, you will already begin losing money, and pregame maneuvers will likely be too little too late.
2. Bad News Will Come in Waves
As the downturn begins to build momentum, bad news will begin to pile up. It’s not that bad news isn’t there during bull markets; rather, it becomes more pronounced and more common during market downturns. And since it’s affecting people’s investments and therefore their net worth, it will suddenly become newsworthy.
Negative predictions about the stock market will be accompanied by dark-cloud stories about the economy in general and the state of the nation’s financial affairs.
Those stories are there even during bull markets, but when people are making money with their investments, they have a greater tendency to overlook them. During market downturns, reports of economic troubles are seen as an explanation for what’s happening in the markets, which is why they become more popular.
3. People Will Panic
Sandwiched between the twin stresses of declining stock portfolio performance and an increasingly relentless blizzard of negative media news, you begin to panic. Maybe only a little at first, but if the downturn is particularly steep, then your panic may run rampant. You may find yourself entertaining feelings of panic more than just occasionally.
The level of panic will run with the level of the stock market. If the decline is gentle or if it is punctuated by pronounced recoveries, panic will be held to a minimum. But if the market shows successive declines, the panic will become deep, even to the point of driving the market lower.
4. More Bad News Predictions Will Be Rampant
You know how during bull markets, analysts will often try to outdo one another in predicting how high the market will go: 20,000, 25,000, 30,000, 50,000? That process works in reverse during market downturns. You’ll see predictions of DOW 12,000, 10,000, 8,000, 5,000 — maybe even back to the 800 level of 1982 when this great bull market began more than 30 years ago.
It’s all about sensationalism. Predictions of extreme movements, whether higher or lower, draw people’s attention. During bull markets, predictions of higher market thresholds feed into human greed. During bear markets, predictions of lower market thresholds feed into human fear.
In truth, none of the “analysts” who predict such bold moves in the market know anything more than the rest of us about where it’s headed. But it’s not about truth — it’s about getting noticed. Whether the predictions are a play on greed or fear, they will generally get people to read articles, watch videos and programs, and buy books and “how to” guides.
The predictions themselves are completely meaningless, but the fact there are so many predicting much lower stock market levels will be yet another marker of a serious downturn.
You should be fully prepared to ignore the predictions.
5. Good News Predictions Will Come In Too
At the opposite end of the spectrum, there’ll be any number of experts who will do their level best to talk up the market, perhaps in the hopes that their predictions alone will help to revive it. It will look almost like a counterplay to those calling for lower market thresholds.
For example, while one analyst may declare that the market is going down to DOW 8,000, another may confidently predict the bottom will be in at 12,000.
One prediction will be just as ridiculous as the other, except that the person predicting a market rebound will probably back up his or her claim with reams the impressive looking data, accompanied by convincing charts and graphs.
The problem with “the bottom is in” predictions is that they can’t account for investor emotion. While it may be easy to say that the market will bottom out when the P/E for the S&P 500 falls to 15, fear may drive the market down to where the P/E falls to 10 or even lower.
Once again, you should be fully prepared to ignore the predictions — even though they may sound comforting.
6. The Investment Environment Will Look Hopeless
Stock market downturns are usually accompanied by some sort of major negative news relating to either the economy, the financial state of the nation, or major geopolitical concerns. That was certainly the case during the 2000–2002 and 2008–2009 crashes.
While it may be easy to say that you will ride out the next crash, it will be harder to do in practice as the investment outlook declines and eventually comes to look completely hopeless.
Consider these major media news stories that were issued in the fall of 2008, during the darkest days of the 2008– — 2009 financial meltdown:
CNN, September 29, 2008: Stocks crushed — “…with the Dow slumping nearly 778 points, in the biggest single-day point loss ever…. The day’s loss knocked out approximately $1.2 trillion in market value, the first post-$1 trillion day ever….”
Bloomberg October 10, 2008: Stock Market Crash: Understanding the Panic — “If ever it were appropriate to revive the term ‘panic,’ this is the time. The day-after-day declines in the stock market are unprecedented. The S&P 500… has lost 22% of its value in six trading sessions, from Oct. 2 to Oct. 9.”
The Guardian, October 10, 2008: London suffers third biggest fall in ‘great crash of 2008’ — “What we are witnessing is mass selling on a global scale due to a combination of sheer panic and fear, combined with complete uncertainty over the future of the world’s major economies…. Investors are effectively pricing in the possibility of a global depression.”
It can be difficult indeed to stay the course when it truly looks as if the sky is falling. But there is one silver lining to this scenario: When the news gets that bad, it’s likely that the worst is over. At that point, speculation has been flushed out of the markets, good investment plays can be had at discount prices, and the worst of any price declines is behind us.
But that’s when it will also take nerves of steel to reverse course and begin buying up all of those bargains at the bottom.
7. Your Investment Portfolio’s Importance May Be Exaggerated
This is the “squeaky wheel” syndrome; whatever issue in your life is causing the most stress will become the most important part of your life. It’s similar to what your attitude might be if you are facing a career crisis, in which the loss of your job looked imminent. You would likely spend most of your time either making contingency plans for the job loss or worrying about it.
So it will be with your investment portfolio if it is steadily declining in value. You’ll worry about it, and you’ll be tempted to micromanage it in the hopes of minimizing the damage.
This is just a list of the kinds of outcomes that you can expect to see when a downturn in the market occurs.