I’m always a little amazed when we see large market pullbacks at how calm our clients are during those drops. Although I know there are concerns – that’s human nature – we’ve not fielded one call from a client on what to do with their portfolio through Thursday. If we’ve done a good job of explaining how to manage risk in putting together your portfolio, the drop should be within what you thought you could handle. Nevertheless, I thought it would be a good idea to reach out and explain how I see what’s going on. For that, I’ve also leaned on our primary research firm, Nasdaq Dorsey Wright, to add perspective. In reality, their indicators imply this could be a short term event with, at the present time, no underlying reason a 2008-type event is imminent. Their additional comments are as follows:
The speed with which the market has pulled back has been surprising. This was the first time the market had experienced back-to-back 3% down days since August 2015 and only the 10th such occurrence since 1950. Thursday’s drop of 4.42% exceeded Monday’s by more than one percent, marking the worst single day for the index since August 2011. Given the velocity of the pullback, many investors are probably more worried about the effect the corona virus is having on their portfolio than they are about the virus itself. The sudden sell-off has been painful for anyone with significant equity exposure, however, where there is strife there is also an opportunity.
In some ways, investing is like boxing – you create a plan and a strong portfolio that will absorb the blows from the market, recover, and keep moving forward. But, like Mike Tyson once said: “everyone has a plan until they get punched in the mouth.” When investors begin seeing red day after red day and their retirement portfolio being eroded away, panic often ensues. And like a panicking boxer, who wants only to get out of the ring, that fear can lead them to abandon their plan and make rash, unwise decisions. This is exactly what many investors did during the financial crisis when they couldn’t take any more pain and liquidated their portfolios at or near the bottom. Our goal is to help you avoid the panic, stick to your plan, and keep you in the game.
While every correction is painful, they aren’t all that rare. Including this most recent pullback, SPX has declined by 10% or more 32 times since 1980, which on average, is about four times in any five year period (for our purposes, we defined the correction as being over when the market rallied 10% off of the bottom). During a correction, it always feels like the sky is falling, but history tells us that these types of moves are to be expected.
In times like these, the media can be counted on to add fuel to the fire. And you’d have no problem finding financial pundits saying that this time is different, and this is going to be the worst market since 2008 or the tech crash or any other massive bear market. Could they be right? Could this be the big one? There’s no way we can say definitively that they’re wrong, but nine times out of 10, these doomsday predictions have been wrong. Remember Q4 2018 when they were sure that trade tensions were going to put us into a recession and a sustained bear market? SPX went on to rally and gain nearly 30% in 2019.
In one way, the current sell-off is different than most, but not in the way the media means. Through Wednesday’s close, SPX had pulled back almost 8% in five trading days. Since 1950, there have only been 54 times when the market declined that quickly (a drop of 7.5% or more in five days). That’s fairly uncommon, but, what really makes this time stand out is that there have only been two other times when we’ve seen such a quick drop when the market was in an uptrend (we defined this as being above its 200-day moving average). The first was in October 1997 during the Asian financial crisis, which spilled over to European and US markets and the second was in February 2018. In both cases, the peak to trough drawdown was contained at about 10% - 10.8% in 1997 and 10.2% in 2018. And in both cases, SPX had strong rallies shortly after. In the five days ending 10/27/97, the market dropped -8.23%, one month later SPX was up 8.73% and six months later it was up almost 25%. In the five days ending 2/8/18, SPX dropped -8.54%, one month later it was up 6.4% and six months later it was up nearly 12%. Of course, there is no way to know if this time will be the same, but it does give us some useful perspective.
Please feel free to call us if you have questions about your account or the market drop. We’re here to help!
Mike