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Stocks Are Down, but Don’t Bet Against History

I woke up this morning to a red mist. As most of you reading this have probably already heard, Wall Street stocks were crippled last night as the news broke that China had devalued its currency.

The S&P 500 was down nearly 3% in a brutal trading day. Meanwhile, the Dow shed 760 points, or 2.9%. With overnight trading continuing lower, stocks in the US could open even lower tomorrow.

It’s hard to say if this decline will continue, especially given that neither the US nor China is backing down from the trade war. 

However, before you hit that sell button, realise that stock market sell-offs such as this have happened before. Many times, in fact, and each time, the stock market as a whole has rebounded even stronger than before, climbing above its previous high to reach fresh peaks.

2000

Take the dot-com bubble of 2000, for example. During the dot-com bubble, the technology-heavy Nasdaq index tumbled 76.81% in just six months. 

Of course, many of those companies, such as the infamous Pets.com, went bust shortly after. However, fundamentally sound companies were also hit hard by the sell-off, and they became great deals.

Amazon.com fell from a peak of US$100 to US$9 per share. It would be understandable for shareholders to rush to sell in a panic at that time. However, fast-forward to today, and Amazon is now worth around US$1,750 per share.

This just goes to show that holding shares of fundamentally sound companies can be hugely rewarding, even as prices decline.

The Nasdaq composite also recovered all its losses and today sits more than 50% above its peak before the crash.

Investors who were savvy enough to embrace the opportunity could have used the dot-com bubble to pick up shares of sound companies on the cheap.

2008

The financial crisis of 2008 was probably one of the worst global crises in history. The crisis began in the subprime mortgage market in the United States and developed into a global banking crisis that eventually led to the collapse of Lehman Brothers.

The crisis also led to a global recession, with numerous companies laying off employees and downsizing.

The US stock market peaked in October 2007, when the Dow Jones Industrial Average index exceeded 14,000 points. After the sell-off, the Dow reached a trough of 6,600 points. However, fast-forward to today, and the Dow is now sitting at 25,700, give or take, even after the pummeling it took last night.

Even local financial institutions such as DBS Group Holdings Ltd (SGX: D05), which saw 67% of its market value wiped out in 2008, has since rebounded to well above its 2007 peak. The bank has also managed to pay out a dividend each year since then.

Stay strong, and Fool on

While it is easy to start selling in a panic, history has shown us that stock market sell-offs may, in fact, be the best time to be buying rather than selling. 

The current trade war may have a very real impact on a company’s growth trajectories and even lead to a near-term recession. However, as has happened numerous times over, well-run companies with solid financials will still be able to do well over the long term.

Investors should not miss out on the long-term opportunity due to the short-term volatility of stocks. The above examples are just two instances of steep market declines. In fact, major market sell-offs have occurred in 1915, 1939, 1945, 1969, and 1978 (not counting numerous smaller peak-to-trough years), along with the two examples above, with stocks rebounding stronger each and every time.

Will it be different this time? You’d be a brave person to bet against history…

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Jeremy Chia owns shares in DBS Group Holdings Ltd. The Motley Fool Singapore has recommended the shares of DBS Group Holdings Ltd.