Boy, did that escalate quickly.
Thursday was a pretty rough day in the stock market, especially in the technology and AI space.
The S&P 500 fell more than 4%. The Nasdaq 100 fell 5.5%. Emerging markets fell 6%. Semiconductor stocks plunged more than 11%. South Korea was down almost 14%.
All this in just one day!
Not all withdrawals are equal in times like these.
Take a look at the declines from recent highs in a multitude of different markets, sectors and countries through Thursday’s close:
Momentum names have seen high volatility this year. Big gains, big losses, multiple cycles in some of these market segments.
It makes sense that areas of the market that saw significant gains are now experiencing significant losses. It comes with the territory. No pain, no gain and all that.
But look at the S&P 500. It’s down a little over 6% overall, although the largest sector has been burned.
S&P sector declines tell the story here:
Technology is almost in a bear market. Industrials, communications services and energy stocks are all down double digits.
But materials, real estate, financial services, health care and consumer staples are all down less than 3%. Other market segments help minimize technological damage.
Diversification to the rescue.
I’ve always been an advocate of index funds, but I’ve been saying since the beginning of this AI cycle that indexing is the easiest way to play it.
Innovation booms are happening faster than ever, and markets are incorporating changing expectations at a breakneck pace. You could be right on fundamentals but wrong on stocks because expectations are too far one way or the other.
It is impossible to know who the winners and losers will be from week to week as technology, investment figures, the regulatory environment and model capabilities evolve.
Just look at this chart of Meta stock price ups and downs:
This is not a 5 or 10 year chart. That’s just in the last 10 months!
It’s a bull market! It’s a bear market! They win! They lose! They are going up! They are crashing! The speed of repricing is insane.
Owning the S&P 500 or Nasdaq 100 won’t make you a hero, but it gives you the best chance of owning the winners, whoever they may be. That’s the beauty of index funds: they pick the winners for you.
Obviously, index funds are not immune to declines. A bigger problem will occur at some point.
This year is rather calm in a context of historic volatility.
The average intra-annual peak-to-trough decline of the S&P 500 since 1990 is -14%:
The S&P was down 9% when the Iran war broke out. That’s only a 6% decline in the current downturn.
It is simply a bodily injury.
This may be the start of a larger correction. Maybe the AI business will really explode this time. Or maybe it’s already over. Who knows.
Long-term stock investors know that volatility, corrections, and setbacks are a natural part of the investing process:
A bear market will happen again.
It will be scary at the time.
Stocks will bottom when everything looks bleakest.
Then they will return to new all-time highs.
You just can’t predict when it will happen.
But you can prepare for it.
Now is a great time to re-evaluate your pain threshold for losses.
Michael and I talked about the AI stock crush, the benefits of diversification, and more in this week’s Animal Spirits video:
))>
Subscribe to The Compound to never miss an episode.
Further reading:
A bloodbath on the stock market?
Books:
Gn bussni
