With inflation surging, the war in Ukraine roiling global markets and the after-effects of the pandemic still clogging supply chains, everyday investors have been jittery. But some had their nerves pushed to the edge this week after the Dow Jones Industrial Average took a swoon on Wednesday of more than 1,100 points, followed by a loss of another 237 points on Thursday — a loss of 4% in two sessions.
"There are more and more clients being nervous," said Anthony Valeri, director of investment management for California Bank & Trust, headquartered in San Diego. "And that happens when you have a severe selloff. It's nerve-racking, it's never fun."
Tech giants have taken a pounding this year, with Netflix down almost 70 percent, Meta (Facebook's parent company) off 44 percent and Amazon down 37 percent. But on Wednesday, weaker than expected first-quarter numbers by many retailers led to a rout.
Shares of Target dropped 25 percent on Wednesday and another 4% on Thursday after it reported first-quarter net profits shrinking 52 percent. Walmart stock has fallen by nearly 20% since Tuesday.
The losses have stoked fears that a recession is coming. A recession is defined as two consecutive quarters of negative growth in gross domestic product.
GDP dropped 1.4 percent in the first quarter of this year. In 2020, at the start of the pandemic, GDP went negative in the first and second quarters before sharply rebounding.
So far this year, the Dow is off 14.7 percent while the Nasdaq has slipped 28 percent and the S&P is down 18.7 percent.
But for perspective, while the Dow was down 3.6 percent Wednesday, when the market severely contracted on what was called "Black Monday" in October 1987, the Dow fell 22 percent in a single day. And over the course of the dot-com crash that took a couple of years to unwind, the Nasdaq was down 76 percent.
"Don't freak out," Valeri said. "Yes, things could get worse, but know that you've got to have a long-term perspective. ... These types of fluctuations are part of investing. It's kind of what we call the price of admission to higher returns over time."
Given the number of geopolitical tensions at play, Allan Timmermann, professor of finance at the Rady School of Management at UC San Diego, said "there's a high level of uncertainty that is now likely to persist for a number of months."
In the hopes of cooling inflation, the Federal Reserve is expected to raise interest rates by the end of the year to about 3 percent.
"That will make bonds more attractive, stocks relatively less so," Timmermann said. "That will lead to some portfolio rebalancing out of stocks and into bonds. And the question is whether it will hit companies' earnings prospects because if those start dropping, that could lead to a reduction in investor confidence."
His advice for everyday investors is to "tread carefully and don't try to use strategies having to do with predicting the bottom or the top of the market because in these periods, it's just going to be extraordinarily difficult."
Mike Ryan, divisional vice chair of UBS Global Wealth Management and frequent guest on financial networks like CNBC, talked to investors Tuesday in La Jolla about navigating a rocky financial environment.
"We're coming off an extraordinary bull market and we were generating double-digit returns and interest rates were coming down. We can't replicate that now," Ryan said, "so we're going to have more measured returns. So let's moderate our expectations."
He advised looking at alternative investments in private equity, private credit and hedge funds designed to outperform during periods of volatility or falling markets.
"This is actually a target-rich environment for places like global macro funds," Ryan said. "Overall, I would remain invested but that doesn't mean you're just static in terms of your portfolio decision-making."
Valeri of California Bank & Trust said the average decline in a severe selloff comes to 23 percent and, using the tech bubble and the Great Recession of 2008 as guides, his company calculates that a big selloff combined with a recession averages 37 percent.
"Unfortunately, investors can let emotions get the best of them and sell at the exact wrong time," Valeri said. "We never know when something could change the outlook dramatically and the markets take off. Some of the best returning days happen soon after some of the worst. So it's important to just not make emotional knee-jerk reactions and stick with your financial plan."
