In a recent article by Bryce Sanders in a commentary written for ThinkAdvisor magazine, we were reminded that “Television programming is funded by advertising. Advertisers want viewership. One of the best ways TV news programs can keep people watching is to make everything a crisis.” While news is important, it’s still necessary to step back and put things into perspective. For example, with the Dow Jones Industrial Average trading around 25,000 it’s important to realize a decline of -799.36 (as we saw on Tuesday, Dec 4) is a -3% drop. Did you know that for all of 2018 we have seen four daily declines of greater than -3% and this was the smallest of them? These were on Feb. 5th, Feb. 8th, Oct. 10th and then again on Tuesday, Dec. 4th. To the contrary, we have seen five days with returns greater than +2% and 26 days with a positive return greater than +1%. The market will fluctuate. But remember from each of the previous declines we eventually recovered. The amount of time varies. Sometimes it was within a week and as we saw in 2008 it took a handful of years. The important thing to put into perspective is not every decline is a “crisis” and investors who stuck to their plan and didn’t panic eventually recovered, often going on to new investment highs. Talk to your financial advisor to help put today’s volatile markets into perspective.
Recently I was reminded by one of my most respected CFP® friends of a quote by Warren Buffet regarding investors overreacting during market corrections. Karl has a “knack” of giving sound, time-tested financial advice in a very crystal clear way his clients and others appreciate. Hopefully this will shed light on why investment advisors throughout the country encourage clients to avoid getting drawn into market timing and trying to “run for exit the doors” when markets correct.
“The Market is the most efficient mechanism anywhere in the world for transferring wealth from inpatient people to patient people.” – Warren Buffet
After days like these in the markets we know people are concerned. So hopefully these thoughts can help add a little light to something that may seem very “dark” and confusing.
I could bore you with details and go on and on about the possible cause (China’s economy slowing, a strong U.S. dollar, the Federal Reserve possibly raising interest rates in September, the collapse in the oil sector as well as other raw materials, etc.) but remember there typically is not just “one” event that causes this much volatility.
So you may ask what these events (external factors) might have to do with the U.S. stock market. First, investors and market prognosticators are worried that individual companies that make up the stock market may begin to suffer lower earnings and slower revenue growth causing their stock prices to drop even more. Additionally, there are some views that these events could cause our economy to enter another recession.
In terms of the U.S. our economy is currently in the best condition around the world. Economic growth is not robust, but as economist Brian Wesbury says, “we are seeing a steady ‘plow horse’ type of growth.” And though our oil industry is in the “doldrums” the U.S. consumer and our banking system is in much better financial condition (since 2008). Other economic sectors such as retail sales, wages and housing starts are experiencing good growth.
In terms of the U.S. consumer we haven’t paid just $2/gallon for gasoline since March 2012, and unemployment is much lower with more Americans back at work today. And regarding China… keep in mind that our exports to China only amount to 0.7% (less than 1%) of our economy.
As I am writing this today, the U.S. stock markets have just rallied to close up over 600 points (almost 4% on the day) from recently being down approximately 12.5% from their annual highs. History tells us on average that we experience a 10% correction every 18 months (although the last was in October 2011) and 5% corrections occur as much as 4 times every 12 months. Also, looking at the calendar August through early October is typically a bad time in the market.
So is there a positive in all this… yes! There has been lots of money sitting on the sidelines waiting for lower prices to enter the markets. These type of swings in the stock market are “buying opportunities” for new money that has been waiting for a good entry point. During times like these investors can step in and “buy bargains” which also brings new money in to help support stocks. After a period of time markets typically recover and go on to set new highs.
Our suggestion? Step away from all this “clutter and noise” and try not to react. Remember what you voiced when you started investing… a long-term perspective and that you realized markets would fluctuate (go up and also go down). Research tells us when volatility kicks in, this is typically the time investors make “poor” investment decisions and suffer the consequences for years. If you simply have the urge to try to “fix it” or you can’t handle what’s going on, then get professional investment advice now.
Remember we are here to help. Please call us if we can help you or someone you know.
A look back reveals how far we have come since 2008 – consider these eight event-driven headlines that were seen in the 4th quarter of 2008:
- Dow falls below 10,000 (Oct. 6)
- Dow finishes worst weekly slide (Oct. 10)
- U.S. to buy preferred stake in 9 Financial Institutions (Oct. 13)
- Obama Elected President (Nov. 4)
- Auto Execs ask Congress for help (Nov. 18)
- Madoff charged with fraud (Dec. 11)
- Fed cuts Fed Funds rate to a range of 0%-0.25% (Dec. 16)
- Oil closes at $30.28 per barrel (Dec. 23)
Considering these and other major headwinds we have recovered from since the crash of 2008, we’ve survived some major events. Sometimes it’s beneficial to look back can consider what we’ve been through as we continue to look ahead and plan for the future. [Source: Morningstar, Inc.]
In life we all experience times of trouble or difficulty. In fact, life tends to cycle from good times to bad and back again. But when rough times come, seldom is it a good thing to panic… to react by making decisions out of fear or emotion, or even worse, to run from the trouble at hand. One thing I’ve learned recently is when life has it’s difficult times, we are wise to lean into those troubles and work through them. And we aren’t successful in this by doing it alone… friends help, mentors, family and even God is there with us in the midst of our troubles.
Financially speaking, we must realize that our investments will also face turbulent times. Just as in life, markets cycle and various investments go in and out of season. The real question is when the volatile times come, how do we handle them? A little encouragement is to avoid two common mistakes: don’t react on emotion, and don’t try to face these times alone. When working with a financial advisor you aren’t alone. They can provide objectivity on your portfolio and help you through choppy markets.
The other lesson learned is that we do eventually get through the rough waters (at some point). Of course, stock markets don’t recover overnight. On average one 20% correction occurs every five years, but their recovery times vary. According to Bloomberg, in 1974 the market suffered a -37% loss and took over five years to recover… but from 1981-1982 the market suffered a -25% correction and only took 83 days to recover. And of course we are recently familiar with the corrections from 2000-2002 and also in 2008.
So what do we take away from this? In the tough times don’t panic and avoid making quick, emotional decisions. Remember the proverb that states, “The plan of the diligent lead to profit as surely as haste leads to poverty.”