Gut Check in Rocky Markets – 2018

Do we blame it on the Philadelphia Eagles winning the Super Bowl??  (just kidding- I am glad the underdogs won!)

From the archives of TGIF 2 minutes I found a very handy message – one that still holds true two years later for surviving the weakness we are currently experiencing in the stock and bond markets.  Here is the original article: click here. The title of the message was “‘Gut Check’ in Rocky Markets” (Jan. 2016).  As even as the most experienced savers and investors can tell you, down markets are not fun and they can be scary and stressful.  However, I try to remind my clients and friends NOT to allow short-term market moves (weekly, monthly, quarterly…even lasting the course of a year) to lead you to make poor decisions. Rather, make your investing decisions alongside a trusted adviser – and ideally far in advance of a market decline. (Hint: most of my clients can stop reading here and say “TGIF”.)

Market Correction
Source: Bloomberg Markets, February 8, 2018

Fast forward to today: there are several prime factors, among multiple others, having led to the current weakness in both stocks and bonds:

  • Nearly 10 years of UP stock markets
  • Six years without a 14% or more peak-to-trough decline in S&P 500
  • Nearly 10 years of near-zero interest rates set by the US Federal Reserve
  • Now, in 2018, a new US Federal Reserve Chairman with a stronger mandate to raise interest rates
  • A recent increased concern for inflation becoming more present in the relatively strong US economy

These factors have existed in prior decades but perhaps not all at the same time.  An important calming factor is data telling us that on average, each year since 1980, the S&P 500 has had an intra-year decline of approximately -14% while in a majority of those same years the index ends with a gain*.  As of today, an intra-year decline of 14% has not happened since 2011 (seven years ago) when there was a 19% intra-year decline.  That year the S&P 500 finished UP over 2% (including dividends).  Meanwhile, less calming is that in the past couple of years there has been a lack of major volatility – either up or down – in the stock market.  There is likely a time to come (we may or may not be entering that time now) when the markets will decline for an unknown length of time more than the average intra-year -14%.

This year – as in any year – the S&P 500 could finish DOWN for the year. In addition, bonds, often the “boring” investment vehicle, may also decline for a period of time, as the US Federal Reserve has indicated they are in “tightening mode” which means they are looking to gradually raise interest rates. By definition, bond prices move in the opposite direction of interest rates. Although investors can tend to flock to the safety (and boredom) of bonds in a stock market decline, current inflation fears are making that scenario less universally attractive in the short-term as well.

Does any of this information make you feel any better? And/or should your strategy change?  The ideal scenario is to have made your investment decisions PRIOR to today and accounting for both up and down markets. If you still need reassurance (we are human!) there is time to adjust and talk it through. The effects of a market decline can be greatly lessened by talking through your original goals and truly understanding your personality. That is what I am here for – to have those conversations with you.

Please do not hesitate to call me.  We can even poke a little fun at “Tom and Gisele” to take the edge off.

*Source: Standard & Poor’s, FactSet, J.P Morgan Asset Management.  Returns based on price and reinvested dividends.


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