The current pull back in the stock market once again gives us an opportunity to remind everyone just how normal and frequent these events are. Since the end of September, the S&P 500 is down about 6.4% and the broader Russell 2000 is down about 9%. Our clients have heard us preach endlessly about the normality of market volatility. Market pullbacks (declines of -5% to -9.99%) and market corrections (declines of -10% to -19.99%) are part of a normal market cycle. As of last week, we have experienced 17 of these events since the end of the Great Recession (March 2009). That equates to just about 2 a year.
According to Sam Stovall, Chief investment strategist at CFRA, a Wall Street research firm, since World War II there have been 56 pull backs and/or corrections. While there’s always exceptions, on average, the market recouped its losses in a month and a half.
History has shown that equity results have largely been driven by fundamentals—specifically, by earnings growth. As long as earnings growth has remained positive, we’ve tended to experience positive returns from equities. This year, FactSet pegged earnings growth at 20% with 10% slated for 2019. Remember, the markets tend to look forward rather than backward. This means that on average, the market is looking 6 to 9 months ahead to guess what earnings will be.
As interest rates rise, there is an implication for higher borrowing costs for companies, which could adversely impact their earnings. Traditionally, interest rate increases that come gradually, and are the result of growth tend to be less disruptive than increases that come as a counter to high inflation. Thursday’s CPI report provided another mixed bag of news, with the pace of headline inflation over the past year falling back toward its trend. This tells us that inflation is not the main motivating factor for the current interest increases.
While we’ve been talking about market volatility for years, and the last couple years specifically, knowing its coming doesn’t always make it less painful. There is still a natural human reaction to seeing the markets and your portfolio dip into negative territory, no matter how temporary those fluctuations may be.
The question is “What to do about it?” The answer is of course “financial planning.” Proper financial planning can help provide the peace of mind you need not to panic during stock market downturns.
You’ve repeatedly heard us say do not invest short term money in long term investments. As a default, money that you know you will need to spend in the next 12 to 24 months should be invested in non-volatile, liquid investment vehicles. For many of you, that means the money you know you will be pulling out of your portfolio over the next year or so should be sitting in the money market. This affords you the luxury of not having to sell off investments during a short-term market downturn. With interest rates on the rise, savers are soon to enjoy slightly higher yields in those money market accounts.
We know getting through market volatility can be tough. If you read this and are still feeling anxious, we hope you’ll give our office a call. We’re here to help.
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