Don't panic about your 401(k) losses. Here's why.
Stocks have a history of recovering before jobs do.
When big public companies slash payroll, no stock seems safe. The current bear market is already being used as an excuse in some corners to condemn 401(k)s and indulge in pension nostalgia.
But before anyone mistakes the current market slump for a reason to drive us back into pensions, consider that historically the stock market recovers and even rallies well before the job market bottoms out. So out-of-work Americans who have a 401(k), including myself, should take heart.
Our retirement funds probably aren't too far away from getting back to work. Stocks are down 40 percent from their last peak, putting us deep in the bear den. But since investors can execute trades much faster than corporations can start hiring en masse again after a recession, stock prices will likely rise before the economic recovery is official.
That means those of us who leave money in the market, or push our 401(k)s back into stocks while prices are low, could see returns again even as unemployment continues to increase. As an old Wall Street adage holds, if you panic, it pays to panic early. The time to flee the market is before things get really bad, not when they're at or near their worst.
This is something President Obama hopefully keeps in mind as he crafts his economic recovery plans around a desire to boost employment.
Today's unemployment rate is 7.2 percent. The last time unemployment reached this level or higher thankfully wasn't the Great Depression, but 1992, when unemployment was 7.5 percent. If we reach 9 percent unemployment by this year's end as some economists predict, that would get us on par with levels of the early 1980s. That's also the last time we saw continuing jobless claims as high as they are now.
As bad as those numbers are, we should all be glad if the 1980s is our closest guide. The two recessions we had early that decade lasted almost two years combined, as figured by the National Bureau of Economic Research.
The stock market's behavior back then also gives us hope. In the 1980 downturn, which lasted six months, the S&P 500 rallied 20 percent off its low before continuing jobless claims peaked, according to research by Bespoke Investment Group. Then in the 1981-82 recession, which took 16 months to get through, the S&P 500 had already rallied 38 percent by the time continuing jobless claims peaked in November 1982, according to Bespoke. Going back further, in the 1973-75 recession, when unemployment topped 8 percent, the S&P 500 had rallied 40 percent before continuing jobless claims peaked.
It's hard to time the market. But the truth is people investing for retirement don't need to worry about timing the market. If they invest a portion of every paycheck, they're buying in good times when stock prices are high, as well as bad times when prices are low. Barring a permanent crash, low markets as a whole eventually rise. How much you invest depends on your age and income needs, of course, but even older Americans who have seen their savings plummet needn't turn all their paper losses into real ones by selling everything at rock-bottom prices.
No one can predict exactly what stocks will do. But we know that economic data tell us what's already happened. The financial markets, in contrast, look ahead. These are very volatile times, and the policies that Mr. Obama and the new Democratic-controlled Congress pursue matter. So far in this downturn, the S&P 500 last hit a low on Nov. 21, 2008. Since then, it's up 14 percent. If the past is prelude, stocks don't have to, but they surely can, keep going up. Even in times as tough as these.