Investor FAQ: Navigating the market downturn

1. Why is the U.S. market going down?

The U.S. stock market is facing a period of heightened volatility and caution as investors grapple with the ongoing uncertainty surrounding U.S. President Donald Trump's trade policies and growing concerns about the broader economic outlook.

2. Should I sell my investments now?

A downturn doesn’t necessarily signal a crisis but is often part of the normal market cycle. Selling in a downturn can lock in losses and prevent you from benefiting from a future recovery. If your investment thesis remains intact and you have a long-term horizon, staying invested is often a wise strategy. However, reassessing your portfolio to ensure it aligns with your risk tolerance is always a good practice.

3. How long do downturns usually last?

Every downturn is different, but historically, bear markets (a decline of 20% or more) last an average of 9-16 months. Corrections (declines of 10-20%) tend to be shorter. Markets tend to recover over time, but patience is key.

4. How bad can it get?

While some downturns are mild, others can be more severe, like the 2008 financial crisis when markets dropped over 50%. However, history shows that markets have always rebounded, often reaching new highs over time. The depth and duration of any decline depend on factors like economic conditions, corporate earnings, and policy responses.

5. Are we at the bottom yet?

It’s difficult to pinpoint the exact bottom until after it has passed. The volatility index, VIX, is a key gauge of fear and a level of 30 or above is typically interpreted as a sign of true panic. We are currently hovering just below that level. Another sign is capitulation, when investors rush to sell, leading to a massive volume spike, often 4-5 times the average daily volume. This can suggest a final wave of selling before the market stabilizes.

Fundamentally, signs of a bottom could include a stabilization of corporate earnings, and central banks shifting toward more accommodative policies. However, markets often recover before economic data shows clear signs of an improvement, making it tricky to time the bottom precisely.

6. What should I do if I’m nervous about my investments?

Consider reviewing your asset allocation. Diversification across different asset classes - stocks, ETFs, bonds, commodities, and cash - can help manage volatility. If short-term losses are causing stress, having some cash or defensive assets may provide balance.

7. What could be the signs of a turnaround?

A few potential indicators of a market recovery include:

• Central banks signalling readiness to cut interest rates.
• Earnings growth stabilizing or improving.
• Increased corporate buybacks and insider buying.
• Improving economic indicators, such as job growth and consumer confidence.
• A shift in market sentiment, with investors starting to take on more risk.

8. Are there any investment opportunities in a downturn?

Market declines often present opportunities to buy quality assets at a discount. Look for strong companies with solid fundamentals, dividend stocks for income stability, or sectors that may be more resilient, such as healthcare and consumer staples.

9. Is the era of technology stocks and the ‘Magnificent 7’ over?

Big Tech has led the market for years, but high valuations and competitive threats from China’s progress on AI could mean more pain ahead. While the long-term outlook for AI, cloud computing, and digital transformation remains strong, valuations for ‘Mag 7’ are still rich compared to global markets. Investors may want to be selective, focusing on companies with strong cash flows and sustainable growth rather than pure momentum plays.

10. Should I prepare for a recession?

Recessions don’t always follow market downturns, but it’s good to be prepared. Consider:

• Holding some cash for flexibility and potential buying opportunities.
• Investing in defensive sectors like utilities, healthcare, and consumer staples.
• Maintaining a mix of bonds and dividend-paying stocks for income.
• Reducing exposure to highly leveraged or speculative investments.

11. What about global opportunities?

While the U.S. has led the market for years, international stocks – especially in Europe and China – may offer attractive valuations. Europe’s lower valuations, fiscal policy shift and a possible end to the war in Ukraine make it an interesting play for investors looking for value, while China’s tech resurgence could present opportunities despite ongoing geopolitical risks. Japan has also been an outperformer in global markets due to structural reforms and corporate governance improvements. Diversifying globally could help mitigate U.S.-centric risks and capture potential rebounds in overlooked markets.

12. What if I need cash in the near term?

If you anticipate needing funds soon, it may be wise to keep an emergency reserve in cash or short-term fixed-income investments. Selling stocks in a downturn may not be ideal, so having a cash cushion can help you ride out volatility.

13. How can I protect my portfolio from further losses?

Risk management is crucial. Strategies like dollar-cost averaging, rebalancing your portfolio, or incorporating hedging strategies (such as bonds, gold, or defensive stocks) can help mitigate downside risks.

14. Should I stop contributing to my pension or investment accounts?

No! If you’re investing for the long term, downturns can be great opportunities to buy at lower prices. Continuing contributions through a market decline allows you to take advantage of lower valuations via dollar-cost averaging.

15. How do I know when it’s time to buy again?

Timing the market is challenging, even for professionals. Instead of waiting for the “perfect” moment, consider a disciplined approach, such as gradually adding to positions through dollar-cost averaging.