Markets

Stock Market's Big Selloff Calls for Calm, Context

Investors are left feeling antsy after the Dow Jones industrial average tumbled more than 1,000 points on Monday.

Wall Street's woes are far from over.

What Happened in the Stock Market Today?

An early recovery on Monday, Feb. 5, deteriorated into deep losses that were likely exacerbated by computerized trading that at one point sent the Dow tumbling below 24,000. By the close, the industrial average was off 4.6% to 24,345 -- good for an 8.5% decline from the Jan. 26 closing high of 26,616 and putting the Dow into negative territory for the year. On a points basis, the 1,175-point decline was the largest in market history.

After a stomach-churning day like this, some context helps. Consider this: The S&P 500 index, which is off about 8% from its high, has recorded its first 5% pullback in 406 trading sessions -- the longest such streak without a 5% retreat in the history of the index. The second-longest stretch (394 sessions) was more than 20 years ago. That means 5% declines are actually common, and far from a cause for panic. Throw in the fact that stock valuations were near historic heights, and that even technical charts showed the market as overheated, and that's a perfect recipe for the kind of pullback we're experiencing right now.

Translation: Don't be scared yet, but do be prepared. In times of market tumult, investors often pile into utility stocks for safety and stability, not to mention their sizable dividends. To wit, the Utilities Select Sector SPDR Fund (XLU) suffered the smallest losses of any of the SPDR sector funds. For a little more diversification than single stocks, investors can look to ETFs that hold up better than others (and can even profit) during bear markets. But perhaps the most important thing investors can do right now is keep their heads amid the day's admittedly dour headlines. Instead, learn what you need to know about bear markets -- what they are, and how they happen -- before the next one arrives in Kiplinger's Bear Market Quiz.

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