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Simple Facts About the Market Correction


By Jon Aldrich

Anthony Isola an advisor @ Ritholz Wealth Management an advisory firm based in New York Tweeted out this notecard a couple of days ago and called it “A Market Crash on a Card”. It is a very simple yet extremely helpful look at what we as investors need to consider as we are involved in a “corrective” phase in the markets. Since we have not had a corrective phase in about 2 years it does feel a little scary to many and this notecard is a good reminder that this is a normal part of market cycles. Let’s look at the bullet points Anthony lists on the notecard.

A Market Crash on a Card

Markets Average One 14% Annual Decline:

Just look at this chart below. Now this is as of January 31st of this year, so it doesn’t reflect the last week and a half of excitement. This chart goes back almost 40 years. Note the red dots and the negative number under them that show the largest decline during the year, and then look at the bars above that show the return of the S & P 500 for the year.  This also addresses Anthony’s 4th point that Markets Rise almost 3/4th of the time.

Annual returns and intra-year declines

Daily Dips of 2% or More Occur About 5 Times a Year

This is true. Although this didn’t happen in 2017, on average there are at least 5 greater than 2% daily drops in the market in a year.

Every 5 Years or So Markets Decline Over 30%

That is true of stocks, not bonds. You can also see this on the chart above. Also remember, that few people have portfolios that are 100% in stocks. Most have a diversified portfolio that has some percentage quite a bit less than 100% in stocks. If you are young and still have several years to work, you should look at these periods as great opportunities to purchase shares at a discount in your retirement plans. If you are retired and living off your portfolio, you likely have several years of cash or short-term funds that don’t fluctuate much for you to take what you need for spending and not have to touch your stocks until they recover.

Over Long Periods, Markets (Stocks) Significantly Beat Inflation

Once you start getting out past 10 years, the returns of stocks always outpace that of inflation. Even in high inflation periods like the 1970’s and 80’s.  According to the Morningstar-Ibbotson “Market Results for Stocks, Bonds, Bills and Inflation 1926-2017” There have been 83 Rolling 10-year periods since 1926 and in all 83 of these rolling 10-year periods the returns of stocks beat inflation. Take it one step further and looking at the 88 rolling 5-year periods since 1926, stocks beat inflation in 67 of those 88 periods or 76% of the time. So, if you want to beat inflation, you need to have exposure to stocks.

Selling Low and Buying High NEVER Works!

George Costanza from Seinfeld

Unless you are George Costanza from Seinfeld and the only time things worked for you is when you did the opposite of what you were supposed to do.

Turn Off the T.V. and Don’t Check Your Account

You will be so much more relaxed when you don’t see talking heads screaming over each other about the Dow dropping 1,000 points, blah,blah,blah. Remember, the more sensational the media makes things out to be, the more their ratings go up. Watch old reruns of Seinfeld instead J. Also, resist the urge to check your account online frequently. Nothing good comes of this besides raising your anxiety level and possibly leading you to the next bullet point.

Never Make Important Decisions Based on Emotion

Some of the worst decisions you will ever make occur when one is full of emotion and panic.

A Couple Other Things to Add:

Anthony’s notecard is fantastic and a great reminder, however, I have a couple other points I would like to share.

The Market First Hit This Level Just Three Months Ago

The chart below of the S & P 500 shows where the market is as I am writing this in the afternoon of Friday February 9th. Follow the green line to the left and we are just back to where we were in early November of 2017. Imagine if the market was flat from then until now, we would be in the same place and probably would not be nervous in the least little bit. True it is no fun to look at our statements and see the values decrease but put it in a longer-term perspective by looking at this chart below.

S & P 500 Chart

Sharp Declines are Often Followed by Sharp Recoveries

Just go back to the beginning of 2016, the S & P 500 was down over 10% from Jan 1st to the end of February. By the middle of March it had recovered all of that and then some.  A few months earlier in August 2015, the market dropped over 10% in a couple of weeks (sound familiar?), it recovered by early November 2015. More often than not, the sharpest drops down are followed by the sharpest recoveries.

So please keep in mind the points on Anthony’s notecard and the additional points mentioned here as we all endure this market correction. And try to find some old Seinfeld episodes to watch. Everyone can use a good chuckle right about now.