Stocks are already down about 40% from their highs. What will happen if the global economy plunges into a second Great Depression, as some economists suggest it might? Sorry to be the bearer of bad news, but if that happens stocks will probably drop at least another 50%+ from here.
So should you sell now?
Not if you're a long-term investor.
James Stewart looks at this this question from a high level in today's WSJ. Here are some more specifics.
In October of 1930, the S&P Composite had fallen to 18, down from a high of 31 a year earlier (close to our collapse over the past year). In the next two years, as the global economy cratered, the S&P Composite sank to a horrifying 5, down more than 70% from the October 1930 level. If you had to sell in 1932, you were hosed.
If you just gritted your teeth and hung on, however, you soon got your money back. By the end of 1936, you were back to where you were in 1930, even before accounting for dividends. (You only stayed even temporarily, though--the market then fell again for a decade). By 1945, you were solidly in the black. And your performance over this period was much, much better when you count dividends. So if you just hung on to your stocks through the Great Depression, you eventually did just fine.
But if some economists think we're headed for another Great Depression, shouldn't you just sell now and buy again later, when the S&P has dropped another 70%? No. Here's why:
1. No one knows whether we're headed for another Great Depression. If we did know this, we'd all sell immediately, but we don't. Most experts, in fact, agree it is probably unlikely (which is why stocks haven't already collapsed).
2. Stocks are currently priced to produce an average long-term return (9%-10%). That's much better than cash. Over the long term, stocks will also protect you against inflation, which cash won't.
The stock market is never the place to put cash you need over the next few years. It is horrifying to contemplate the thought that stocks could drop another 50%+ from here--and if you can't handle that possibility, then you should sell enough stocks that you can handle it. It is comforting, however, to realize that even if we do go into another Great Depression, stocks should do fine over the long run from here.
See Also: Time To Abandon Hope? No: Time To Buy