Seeing the Dow shed more than 1000 points and the S&P more than 100 reminds us that markets; like trees, don’t grow to the sky. A normal market is one of two steps forward and one step back. We’ve been experiencing a “bizarro market” for over a year now and maybe we’re returning to more normal market conditions? Keep in mind that just about every positive record has recently been set:
- The longest consecutive streak of monthly gains at 15 months (including reinvested dividends). The average for any given year is 8 positive months and 4 negative months.
- The longest streak (415 trading days) that the market hasn’t had at least a 5% correction.
- 2017 posted 80 new record highs.
- The VIX, which measures volatility, has had an average daily closing price of 11.10 in 2017. This is the lowest price since the index was started in 1986. By comparison the average yearly price is over 20.
- January finished up 5.5% which is unsustainable. At that pace the market would return 66% for the year? The reality is 500 points “aint” what it used to be! In today’s market it represents 1.9%; in 2016 it represented 3.2% and in 2010 it represented 5%? Some of you may remember Black Monday in October 1987. The market declined 508 points to 1739 or 22.61%!! Try not to focus on point moves as much as percentage moves.
- We’ve attached a chart to put things in perspective. The chart illustrates annual market returns for the past 38 years. The grey bar is the total annual return, the pink dot is how much the market lost during that same year. Even though the average intra year decline in any year was 14%, the market still finished with positive returns 29 out of the 38 years.
- Pullbacks are a necessary and healthy action for markets. We’ve been expecting, and trying to prepare our clients for, a 10-15%+ pullback for quite some time. These percentages would mean a drop of 2,600-3900 points on the DOW. Again, if this happens, it’s not the end of the world. We’ve been conditioned to believe the market is a no-lose game. It’s good to be reminded that with reward there are always some risks. We also realize that it is often easier to talk in terms of % swings vs real $$$$ changes.
- Warren Buffet said “the stock market is a device for transferring money from the impatient to the patient” Peter Lynch, one of the greatest mutual fund managers in history, said “the key to making money in stocks is not to get Scared out of them”
- We believe volatility will continue throughout the year. If you must watch the markets day to day try to focus on the broader, longer term, picture and believe in the power of the markets not the commentators on TV.
- Everyone has an aggressive risk profile when the markets are going straight up. If volatility like we experienced Friday February 2, 2018 caused you to lose sleep we recommend meeting with your advisor and revisiting your risk number.
- We believe in the power of true financial planning and having an overall strategy to realistically hitting your goals. Having a relationship with an advisor you can trust will enhance your Financial Peace of Mind!
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