The markets today may seem to be illogical. In the short term, it’s a fair evaluation. However, there is a logical rhythm from an economic cycle perspective. The markets are like the tide, they rise and fall in a systematic manner. The cycle begins with recession (depression if you lose your job) followed by recovery, expansion, peak and decline. No one knows how long a full cycle takes to complete or how high or low the markets will go. This pattern has repeated itself for the last several hundred years. The last recession was short and now the economy is in recovery.1
The business cycle is paralleled by an emotional cycle that investors go through as they journey with their investment accounts. Investors start the cycle at the bottom feeling depressed and despondent. When the economy starts to recover, hope is restored with relief and finally optimism. As the economy rises, emotions turn to excitement and euphoria. The investing public may be starting to enter this phase in the current business cycle. The market eventually becomes fully valued and anxiety starts to set in as market volatility increases. People become fearful and panic as declines in market value systematically take place. Eventually, they enter a stage of depression. As cycle begins again, investors are slow to get back in because fear is a stronger emotion than greed.
For younger investors, sell offs are the opportunity to purchase investments at a discount. Market declines are your friend during the accumulation phase. Declines for investors in the withdrawal phase are not your friend but can put retirement or other goals at jeopardy.
1 LPL Financial Outlook 2021: Powering Forward - http://view.ceros.com/lpl/outlook-2021/p/4