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The Current Market Decline in ContextSubmitted by Flourish Wealth Management on February 6th, 2018
By: Jay E. Pluimer, AIF®, CIMA®
Director of Investments
If we’ve been doing our job as your fiduciary advisor, you might already be able to guess what our take is on current market news:
Unless your personal goals have changed, stay the course according to your personal plan.
Still, it never hurts to repeat this steadfast advice during periodic market downturns. We understand that thinking about scary markets isn’t the same as experiencing them. For context, US stocks haven’t seen a one-day pullback of 5% since June 2006, when the S&P 500 Index was at 1,260 compared to its February 2018 level of 2,800. It’s also important to note that US equities are down 1% for 2018 despite the losses over the past couple of days and have risen 17% from a year ago.
So, what’s going on? Why did U.S. stock prices suddenly drop after over 13 consecutive months of positive returns, with no obvious calamity to have set off the alarms?
Several factors appear to be at work here:
- Rising inflation expectations, thanks to accelerating wage growth.
- Rising interest rates (the 10-year U.S. Treasury yield rose above 2.8%).
- A growing market consensus that the Federal Reserve may raise short-term interest rates more than three times this year.
- Investor sentiment, which had become enamored with stocks, has become a contrarian risk factor for the market.
- Potential technical issues related to algorithmic trading programs, possibly triggered by stop orders and/or margin calls on large institutional positions and potentially related to overly large positions in short volatility related products.
While these sentiments may suggest the catalyst for the current drop, they do not inform us of what will happen next. Sometimes, market setbacks are over and forgotten in days. Other times, they more sorely test our resolve with their length and severity. We can’t yet know how current events will play out, but we do know this:
- Capital markets have exhibited an upward trajectory over the long-term, yielding positive, inflation-beating returns to those who have stayed put for the ride.
- If you instead try to time your optimal market exit and entry points, you’ll have to be correct twice to expect to come out ahead; you must get out and back in at the right times.
- Every trade, whether it works or not, costs real money.
Also, be wary of hyperbolic headlines bearing superlatives such as “the biggest plunge since …” While the numbers may be technically accurate, they are framed to frighten rather than enlighten you, grabbing your attention at the expense of the more boring news on how to simply remain a successful, long-term investor.
Instead of fretting over meaningless milestones or trying to second-guess what U.S. economics might do to stocks, bonds and inflation, we believe the more important point is this: Market corrections are normal – and essential to generating expected long-term returns. In fact, periodic setbacks ranging from mild to severe are more “normal” than the record-breaking S&P 500 run-up we’ve been experiencing lately.
We hope it has been helpful to get some additional context for current market events. Our team is happy to connect with you to discuss recent developments and what it means for your long-term plan.
“Volatility Is Back: What the Pullback Means for Investors” by Schwab Newsroom, February 5, 2018.