What short-term market volatility means for your 401(k)

On the heels of a poor jobs report, widespread fears of a U.S. recession sent global markets tumbling Monday, with the Dow Jones Industrial Average falling by more than 1,000 points on the day.

Gregory Daco is a chief economist at the management consulting firm EY-Parthenon. He says while short-term market volatility can raise concerns about Americans' 401(k) retirement accounts, it's not always a sign of long-term financial issues.

"I think you have to have a broader perspective," Daco told Scripps News. "Not everyone is retiring within three months, six months, or even a year. Most of us are going to still be working in a few years time. So you have to take a bit of a step back from the day-to-day volatility. ... If you look at the broad stock market gains over the course of the past year, they're still quite strong."

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Much of the volatility is believed to be tied to concerns that the Federal Reserve missed its window to get ahead of a potential recession by announcing last week that it will not reduce federal interest rates from their current 23-year high.

"I think what we're seeing is a little bit of an overreaction in terms of weakness in the labor market that we saw in the U.S. jobs report for the month of July on Friday," Daco said. "The numbers were a little bit weaker than anticipated and there was a fear that essentially the Fed was behind the curve when it comes to easing monetary policy."

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The Federal Reserve implemented a series of interest rate hikes in 2022 and 2023 to combat high inflation, and rates have remained at their highest levels since early 2001 for the last 12 months — between 5.25% and 5.5%. But amid growing calls for an emergency Federal Reserve meeting to immediately cut interest rates, Daco says it's important to examine your portfolio with a wider lens.

"From a 401(k) perspective, unless this turns into a much more pronounced market sell-off that is more pervasive across all sectors and more profound in terms of its depth, we're not going to see any type of severe retrenchment in private sector activity," Daco said.

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It may be easy in times of short-term market volatility to rush and look at your retirement account balances. But Daco believes it's more important to have a "broader perspective" when it comes to examining your portfolio.

"You want to make sure that you're balanced in terms of taking risk and generating sufficient returns," he said. "So, in an environment where the Fed is going to be easing monetary policy over the course of the next year, year and a half, that is where you want to think a little more strategically about how you place your money and where you place your money in the equity market versus the bond market."