With the Dow Jones Industrial Average swinging around seemingly 1,000 points at a time over the last several days, we’re mindful that investors haven’t seen this kind of volatility for some time. Amplifying the stock market swings is the fact that 2017 saw a historic absence of volatility in the stock market with a fairly steady upward climb.
While the point swings have been dramatic and swift, causing some to recall the carnage of the 2008 financial crisis, we need to keep in mind that a 1,000 point swing on an index at 25,000 is a much lesser percentage change for the index than it would have been even a few short years ago at much lower levels. Looking at yesterday’s 4.1% loss for the Dow, we only look back to June 24, 2016 to see a drop of 3%, and August 10, 2011 to find the most recent 4% drop in the Dow. On the way to an investment conference following Monday’s drop of nearly 1,200 points, one radio commentator mentioned that although it was the largest point drop in the Dow’s history, it doesn’t even fall in the top 100 worst days for the Dow in percentage terms.
All the same, we can imagine the anxiety some may be experiencing. While it may get worse before it gets better, to put things in perspective, despite our having met the definition of a stock market “correction” (a drop of 10% from a recent market high) over the last couple of weeks, if we zoom out on the calendar, the stock markets remain higher than they were a mere three months ago. Additionally, while we have only seen a few 10% corrections since the March 2009 beginning of this bull market, these corrections typically happen about once a year. It’s a normal, healthy, and inevitable part of being an investor.
While these corrections are a normal part of investing and should be expected from time to time, they do get one’s attention. The unusual thing about this particular correction is that it seems to have been caused by good news in the economy. Corporate earnings are continuing to grow, and the US economy is expected to continue growing, with the US GDP forecast at its strongest rate since the financial crisis. The US unemployment rate is at 4.1%, and wage growth is picking up for the first time since this bull market began. In other words, the volatility that we’re seeing is being caused in response to positive economic data.
In response to the accelerating economy, with a desire to keep inflation in-check, the Fed is expected to raise central interest rates three to four times this year. This potential tightening of monetary policy clearly has some worried that good days in the stock market are over, and gives cause for some to take profits given the nice run we’ve had. While rates are anticipated to go up, they still remain near historically low levels, and we expect rate increases to be measured and slow, a situation that shouldn’t cause one to suddenly declare the sky is falling.
While an instinctive reaction to any stressor is to take action to fix the problem, study after study suggests that investors avoid the temptation to try and time the market by jumping in and out. If anything, corrections are reminders that we should maintain balance within portfolios and invest recognizing a drop or gain can occur at any time. While it’s certainly prudent to evaluate one’s portfolio to ensure it aligns with their long term investment objectives, frequently the best thing to do during times of heightened volatility is that which doesn’t come naturally: do nothing.
As always, we are more than happy to review the appropriateness of your investments and allocation to ensure it aligns with your objectives. Even if you know you don’t want to make changes to your portfolio, but would simply like to talk, we’re here for you, so give us a call.