Worrying About the Stock Market? Don’t.

Photo (cc) by Iman Mosaad

(Editor’s note: Stacy Johnson has been a CPA since 1980 and has also earned licenses in stocks, commodities, options, mutual funds, life insurance and real estate. He spent 10 years as a Wall Street investment adviser and has been investing in both stocks and real estate for more than 30 years.)

Thursday’s stock market decline was the largest this year, undoubtedly creating worries for the millions of Americans with savings exposed to stocks in 401(k) and other investment plans.

If that’s you, take a breath.

There are at least two reasons why this week’s weakness shouldn’t prompt panic.

The economy is healing

The catalyst for the recent decline was the government’s announcement that someday soon — maybe this year, maybe next — it would stop intervening to keep interest rates low. Because stocks, as well as the overall economy, like low interest rates, that’s bad news.

But the good news is the reason the government is cutting back on help: The economy no longer needs it. By just about any metric, from unemployment to retail sales to housing starts, the economy is in better shape than it’s been in for years. When the economy is good, companies make more money. When companies make more money, their stocks increase in value.

Stocks aren’t overpriced

Because the stock market has been doing so well — it’s more than doubled since the lows of 2009 — it’s easy to imagine it’s in bubble territory. But it’s not.

The most common yardstick to measure stock values is the price of shares divided by earnings per share, known as the price/earnings ratio. For example, if a stock is trading at $100 a share and earns $5 a share, its P/E ratio is 20. If it’s earning $10 a share, its P/E is 10. The higher the P/E ratio, the more potentially overvalued the stock.

Based on the Standard & Poor’s 500 index, today’s overall market is trading at about 16 times earnings, slightly below the post-World War II average of 17.5.

Granted, today’s values don’t reflect an undervalued market. But as earnings grow with a healthier economy (see above) that leaves room for stock values to grow as well.

Then why is the market going down?

I just offered two reasons why things are rosy. So why the rout?

First, stocks have been on a tear this year, so some investors will pull the trigger to lock in profits at the drop of a hat. And potentially rising rates are a big hat. In addition, China announced this week that its economy isn’t as robust as believed. As the world’s second largest (behind the U.S.) weakness in China could spill over to the rest of the world, including us.

What’s an investor to do?

If you’re investing for the long term, nothing. Things like Thursday’s sell-off happen. This is the reason stocks have paid more over time than most other types of investments: They’re scary. But for those in for the long term, what happened this week changes nothing.

But weeks like this do offer a golden opportunity for a gut check. If you’re freaked out over your paper losses, take it as an indication you may have too much of your savings in stocks.

Expect more volatility in coming weeks and months. There’s still a lot of uncertainty worldwide and while our economy is on firmer footing, it’s still a bit wobbly. Uncertain times inevitably lead to wild market swings. But then, that’s the way the stock market has always been, and will almost certainly always be.

Lest you think I’m saying one thing while doing another, you’re welcome to check out how I’ve invested my own money. Unlike most investment columnists, I put my money where my mouth is by keeping my portfolio online here.

Disclosure: The information you read here is always objective. However, we sometimes receive compensation when you click links within our stories.

Read Next
10 Things That Really Are Free on Amazon
10 Things That Really Are Free on Amazon

These freebies are available to anyone — no Prime membership necessary.

How to Get the Best Possible Deal on Car Insurance
How to Get the Best Possible Deal on Car Insurance

This is the last article on understanding and shopping for car insurance that you’ll ever need.

Have You Heard of This Best Place to Retire in 2020?
Have You Heard of This Best Place to Retire in 2020?

The best place to retire in America is one you likely are not familiar with.

3 Costly Social Security Mistakes That Women Make
3 Costly Social Security Mistakes That Women Make

Women face unique challenges when planning for retirement and making these mistakes can result in a skimpier retirement.

How to Prepare Your Finances for Retirement in 7 Steps
How to Prepare Your Finances for Retirement in 7 Steps

Here is how to get your finances in shape for your golden years, one step at a time.

View this page without ads

Help us produce more money-saving articles and videos by subscribing to a membership.

Get Started

Most Popular
11 Things Retirees Should Always Buy at Costco
11 Things Retirees Should Always Buy at Costco

This leader in bulk shopping is a great place to find discounts in the fixed-income years.

Over 50? The CDC Says You Need These 4 Vaccines
Over 50? The CDC Says You Need These 4 Vaccines

Fall is the time to schedule vaccines that can keep you healthy — and even save your life.

9 Things You’ll Never See at Costco Again
9 Things You’ll Never See at Costco Again

The warehouse store offers an enormous selection, but these products aren’t coming back.

11 Senior Discounts for Anyone Age 55 or Older
11 Senior Discounts for Anyone Age 55 or Older

There is no need to wait until you’re 65 to take advantage of so-called “senior” discounts.

8 Things You Can Get for Free at Pharmacies
8 Things You Can Get for Free at Pharmacies

In this age of higher-priced drugs and complex health care systems, a trip to the pharmacy can spark worry. Freebies sure do help.

These Are the 4 Best Medicare Advantage Plans for 2020
These Are the 4 Best Medicare Advantage Plans for 2020

Medicare Advantage customers themselves rate these plans highest.

The 10 Most Commonly Stolen Vehicles in America
The 10 Most Commonly Stolen Vehicles in America

A new model parks atop the list of vehicles that thieves love to pilfer.

7 Ways to Boost Your Credit Score Fast
7 Ways to Boost Your Credit Score Fast

Your financial security might soon depend upon the strength of your credit score.

11 Household Items That Go Bad — or Become Dangerous
11 Household Items That Go Bad — or Become Dangerous

When you get the impulse to stockpile these everyday items, pay close attention to their expiration dates.

19 High-Paying Jobs You Can Get With a 2-Year Degree
19 High-Paying Jobs You Can Get With a 2-Year Degree

These jobs pay more than the typical job in the U.S. — and no bachelor’s degree is required.

5 Ways to Get Amazon Prime for Free
5 Ways to Get Amazon Prime for Free

Hesitant to drop $119 a year on an Amazon Prime membership? Here’s how to get it for free.

10 Reasons Why You Should Actually Retire at 62
10 Reasons Why You Should Actually Retire at 62

If you can, here are several good reasons to retire earlier than we’re told to.

3 Ways to Get Microsoft Office for Free
3 Ways to Get Microsoft Office for Free

With a little ingenuity, you can cut Office costs to zero.

14 Things That Are ‘Free’ With Medicare
14 Things That Are ‘Free’ With Medicare

These services could save you money and help prevent costly health problems.

5 Keys to Making Your Car Last for 200,000 Miles
5 Keys to Making Your Car Last for 200,000 Miles

Pushing your car to 200,000 miles — and beyond — can save you piles of cash. Here’s how to get there.

26 States That Do Not Tax Social Security Income
26 States That Do Not Tax Social Security Income

These states won’t tax any of your Social Security income — and in some cases, other types of retirement income.

5 Things That Make Life More Meaningful for Retirees
5 Things That Make Life More Meaningful for Retirees

Retirees agree: These are the things that give them purpose and fulfillment in their golden years.

10 Things You Should Never Do With Bleach
10 Things You Should Never Do With Bleach

Does the pandemic have you reaching for bleach more than ever before? Learn the ins and outs of using this powerful disinfectant.

15 Amazon Purchases That We Are Loving Right Now
15 Amazon Purchases That We Are Loving Right Now

These practical products make everyday life a little easier.

View More Articles

View this page without ads

Help us produce more money-saving articles and videos by subscribing to a membership.

Get Started

Add a Comment

Our Policy: We welcome relevant and respectful comments in order to foster healthy and informative discussions. All other comments may be removed. Comments with links are automatically held for moderation.