That’s the question all company 401(k) retirement plan investors were asking themselves over the long Labor Day weekend.
After cruising for the past five months, the stock markets screeched to a halt on Thursday, September 3rd. The Dow dropped over 800 points, and the Nasdaq plunged nearly 5%. All told, it was one of the worst trading days for stocks since the pandemic-driven panic of March.
The volatility continued ton Friday, September 4th. Last week was a sharp reversal of the new highs for both the S&P 500 and Nasdaq earlier in the week.
So, what does it mean? Was last week’s selloff just a speed bump to slow down the historic stock market advance, or was it a stop sign to signal the beginning of the next great stock market correction?
Unfortunately, market signals are never as easy to interpret in the early stages. But as we start winding down this bewildering year, investors will be watching their company 401(k) balances even more closely.
The S&P 500 rose 60% between March 23rd (its most recent low) and September 2nd (its most recent high). In that same period, the tech-heavy NASDAQ rose roughly 75%! Those are staggering numbers. One could argue we’re overdue for a correction.
Remember, the S&P 500 is an index, not the actual stock market itself. It’s essentially a collection of the five hundred largest companies listed on U.S. stock exchanges.
More specifically, the S&P is a capitalization-weighted index. That means the largest companies make up the largest percentage of the index. For example, Amazon, Apple, Microsoft, Facebook, and Google – just five companies – make up 20% of the index!
Even more scary is the fact that the S&P 500 is currently overweighted to technology stocks, to the tune of 27.4%! So, if the large household name tech stocks were to endure any type of prolonged selloff, that would have a major impact on the S&P 500 as a whole – and could well lead to an overall stock market sell-off.
It’s possible we could see a longer stock market correction in the not-to-distant future. That’s because the future contains a lot of question marks—political, social, economic, and public health–any of which could prompt the stock markets to pull back.
It’s very important now to keep your eyes on which way the stock markets are trending. Keep your attention focused on the stock market road blocks ahead of time and slow down (or pull off to the side of the road) accordingly.
Don’t be like a typical buy-and-hold investor. Establish “stop loss” points, in dollars or percentages. Make the commitment beforehand to exit the stock markets in order to preserve all or part of your company 401(k) retirement plan principal.
Should the current stock market downturn accelerate from here, you need to be mentally and emotionally prepared to play defense or even move to the safety of the money market at any time.
It’s too early to confirm a stock market speed bum or red light. Don’t try to manage your company 401(k) retirement plan account farther out than your headlights allow you to see.
Ric Lager
Lager & Company, Inc.
