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Well, It’s About Time


By Jon Aldrich

It has been quite some time since the stock market has had a rough stretch like it is incurring right now. Of course, the news media and CNBS are doing their best to make a “mountain out of a molehill”. The truth of the matter is that the market was overdue for a “correction” (fancy term for a market selloff). As you will see in the chart below, we had just gone the longest stretch ever without having a 3% correction in the markets and were just a few days shy of the longest stretch without a 5% correction.

Corrections Chart Source: Bespoke Investment Group

The news media headlines such as this one from CNN prove my point of the media twisting the facts just a bit to get those eyeballs:

Dow Plunges

Sure, the Dow plunged 1,175 points yesterday (Feb 5th), but 1,175 points as a “percentage” drop is a lot different when the Dow is 25,000 like it is now versus what an 1,175-point drop would have been years ago when the Dow was 5,000 or 10,000. In percentage terms yesterdays big drop was 4.6% (4.1% for the more broadly diversified S & P 500, which is a better index to follow). So, where does yesterday’s percentage drop compare? It was just the 25th worse loss since 1960 and would barely be in the top 50 all time.

For instance, in the Black Monday crash on Oct. 19, 1987 the Dow dropped 508 points which was a 22.6% drop in one day. If that occurred yesterday, the Dow would have been down by almost 5,800 points. That really puts it into perspective that you only need to focus on the percentage and not the “points”. In 2008 alone, there were 4 days of drops of at least 7% in a day.

Everyone is going to offer their view on why the market is correcting right now, and there is not really one specific reason other than that the market had simply gotten ahead of itself. This happens from time to time and what we are seeing the last few days is actually more typical than the record setting calmness that prevailed through the last half of 2016 and all of 2017. 10% corrections occur in the market on average every 357 days.

So far, the stock market has only fallen about 8% from the recent top. If you have a balanced, diversified portfolio, your loss is much less than that and markets are just back to where they were in late December 2017, just a couple of months ago.

Do you remember the last 10% market correction? A lot of people forget that we had 2 of them just a few months apart in August of 2015 and January and February of 2016. In August 2015 the market dropped 12% in August and recovered by November, 2015. Then just a couple of months later in February 2016 the market dropped a little over 10% and recovered that by mid-March of 2016. It had been almost straight up since then without hardly a sniff of trouble in the market.

Before this in July to October 2011 when Europe was struggling, and US Debt was downgraded the market fell over 16% and recovered by February of 2012. In all these instances, if you got consumed by the fear sold by the newspapers, internet, and TV you may have made panic decisions that you would have regretted later.

The market bounced back nicely today, (it was actually the 4th largest point gain in the Dow in history but is not even in the top 100 all-time for percentage gain) but we could still have a few more weeks of increased volatility and there could still be plenty more downside from here.

When one takes a step back and looks at things, the fundamentals of the economy and the market have not changed in the last few days. True, markets are a bit on the pricey side (less so now than a couple of weeks ago), but there is still plenty of potential to earn decent long term returns by sticking to a long-term plan.

Corrections can be unnerving, but they are a normal function of markets, for a couple of reasons:

Reason #1: Because corrections happen so frequently and are so unnerving to the average investor, they “force” the stock market to be more generous than alternative investments.  People buy stocks at earnings multiples which are designed to generate average future returns considerably higher than, say, cash or municipal bonds—and investors require that “risk premium” (which is what economists call it) to get on that ride.  If you’re going to take more risk, you should expect at least the opportunity to get considerably more reward.

Reason #2: The stock market roller coaster is too unsettling for some investors, who sell when they experience a market lurch.  This gives long-term investors a valuable—and frequent—opportunity to buy stocks on sale.  That, in turn, lowers the average cost of the stocks in your portfolio, which can be a boost to your long-term returns.

It is ok to be a little bit uneasy when you hear about the market’s gyrations and worry about your portfolio. That is human nature and it affects most of us that have a personal stake in the markets. It is also a good time, if you are uneasy, to visit with your advisor and review your asset allocation to make sure it still does align with your long-term goals and allow you to rest more easily at night.

Once it’s over, no matter how long or hard the fall, you will hear people say that they predicted the extent of the drop.  So now is a good time to ask yourself: do I know what’s going to happen tomorrow?  Or next week?  Or next month?  Is this a good time to buy or sell?  Does anybody seem to have a handle on what’s going to happen in the future?

Record your prediction, and any predictions you happen to run across, and pull them out a month or two from now.

Chances are, you’re like the rest of us.  Whatever happens will come as a surprise, and then look blindingly obvious in hindsight.  All we know is what has happened in the past.  Today’s market drop is nothing more than a data point on a chart that doesn’t, alas, extend into the future.

One sure sign of a market bottom, though is when CNBC rolls out their “Markets in Turmoil” special reports. Time after time, that has proven to be as reliable bottom signal as anything out there. Stay tuned!

Markets In Turmoil