Global stocks entered correction territory for the first time in nearly two years. The most commonly cited trigger is increased fear around rising rates and inflation – ironically driven by strong economic results. While dramatic, especially given an absence of meaningful down moves in the last year, the S&P 500 sits just around 4% lower for the year and is relatively in-line with November levels. On Friday, President Trump signed a budget deal which raises spending for the military and ends another brief government shutdown.
S&P 500: 2,620 (-5.2%)
FTSE All-World ex-US: (-5.3%)
US 10 Year Treasury Yield: 2.83% (-0.01%)
Gold: $1,316 (-1.2%)
EUR/USD: $1.224 (-1.8%)
- Monday – U.S. stock markets declined by roughly 4%, leading to severe losses for some hedge funds betting against volatility. Some robo-advisors and discount brokerages reported site outages.
- Monday – Bitcoin dropped below $7,000, nearing a 67% decline from its peak at one point.
- Tuesday – SpaceX successfully launched the Falcon Heavy Rocket.
- Wednesday – Tesla reported a narrower-than-expected operating loss and said it was making good progress on scaling Model3 production. Still, shares fell.
- Thursday – Qualcomm rejected Broadcom’s sweetened $120 billion offer, but said it was open to discussions.
- Thursday – The Dow Jones entered correction territory for the first time in two years.
- Friday – President Trump signed a two-year budget agreement including increased military spending.
Volatility resurfaced from the depths and stocks entered official correction territory (down more than 10%). It feels especially extreme because the last year was so calm, but this is actually the fifth correction of this bull market. If stocks weren’t volatile, it would not be possible for them to generate meaningful long-term wealth creation.
There is no way to know if recent market activity will play out as typical correction, a full bear market, or just as a short blip before charging to new highs (like Brexit or the early North Korea fears). All are reasonably likely and we don’t have an official forecast. But a typical correction feels like the most likely outcome. True bear markets usually start slowly. If you look at 2000 or 2007, they rolled over rather calmly for quite a while before accelerating. They didn’t kick off with a sharp drop. As a general rule, two-thirds of the damage in a bear market comes in the last one-third of the time. This is one reason trying to time the top is typically futile.
Ironically, the most cited reason for recent selling is that the strong economy and job market may lead to inflation or rate hikes. A rise in interest rates would be a bearish driver and is a likely headwind, but rates remain low by historic standards. The earnings yield of stocks is significantly higher than Treasuries and suggests stocks can withstand moderate bond yield increases.
Having said all this, the market has been due for a correction and those can be much more unpleasant than what we’ve seen so far. Corrections generally mean a 10%-to-20% drop and often take months or quarters to bounce back – not days or weeks.
The most important thing we do for our clients is help them build a thoughtful, data-driven financial plan. As part of that, we construct and maintain efficient portfolios strategically designed around growth and cash flow goals. We seek to avoid market timing, maintain disciplined allocations and are ruthless about tax minimization. Why? We think this provides the best chance for successful outcomes over the long term.
Long-term focused or not, it is natural to be emotional in down market periods. Panic selling is rarely a good idea, but if the last few days have made anyone realize they over-estimated their risk tolerance or need a more holistic investment approach, it is still a great time to adjust to the right properly diversified strategy.
Craig Birk, CFP®
Latest posts by Craig Birk, CFP® (see all)
- Volatility May Be Sign of Market Correction, Not Necessarily a Bear - February 9, 2018
- 7 Things You Should Know About Your Finances - February 8, 2018
- Active vs. Passive Investing - January 29, 2018