Is this the much anticipated market correction? Is the sky falling?

chicken littleDear Mr. Market:

Have you heard of the popular children’s story “Chicken Little”? The story begins with an acorn falling on a chicken’s head prompting him to run around declaring that the world is coming to an end, repeatedly stating, “the sky is falling!”   The media has been acting much the same the last few weeks, prompted by the sell off in the equity markets. We’ve discussed the ‘herd mentality’ before, markets like this cause even the most experienced investors to act irrationally and make decisions based on emotions – don’t allow yourself to do the same.

Recently the stock market has been a bumpy ride, it is now entering correction levels. Over the last month the S&P 500 has dropped over -4% and international markets are down as much as -10% or more.   These numbers are alarming but let’s take a moment to keep things in perspective. The S&P 500 is now slightly negative for the year. Last summer (2014) the market was down as much as -7% at one point, did the sky fall then? No, it closed the year up +13%.

Below is a chart from JP Morgan Asset Management, it illustrates the fluctuations that the markets exhibit on a yearly basis showing the low points and where it finished each year. Going back to 1980 the S&P 500 has returned positive results 27 out of 35 years. Here is an even more eye-opening stat – every year since 1980 the S&P 500 has dipped into negative territory! The average intra-year low point for the S&P 500 going back to 1980 is -14% yet the markets finished with average year-end return of 11% over the same time frame. That is not a typo – take a moment to look at the chart below to help put this in perspective!

Intra-year decline chart

This market could get uglier before it gets better. Fingers are being pointed in various directions as to what or who is to blame: The Fed, China, the Energy Sector, Greece and the Euro Zone…and the list goes on and on. The bottom line is that every year there are new economic and global factors that impact the markets. By no stretch of the imagination are we trying to minimize or discount the impact the markets are having on investment portfolios, rather than focus on what has already taken place, let’s look forward.

Where do we go from here…

The end of summer/early fall is a time of year when volatility often increases and impacts the markets. Throughout 2015 we have seen a wide divergence in regards to international markets (developed and emerging), commodities and equities. When there is little to no cohesiveness between various markets it can be very challenging for any upward momentum to be created and more importantly maintained. In markets like this we often see two different behaviors from investors:

(1) Throw their hands up and sell everything. If you sold when the market was down over 15% in 2011 you have missed out on over 7,000 points on the Dow Jones the last several years sitting in cash.

(2) Search for buying opportunities as prices drop. This is like catching a falling knife – be very careful as chances are highly likely that you will get cut!

Our advice would be to resist either of those options and be patient. Monitor your portfolio and rebalance as needed but now is not the time to be making drastic changes. If you are tempted to buy stocks take a moment to look back at past corrections and equity trades that you made. Many of the companies that investors chased no longer exist! This exact scenario could happen in the energy sector during this market cycle. If you find yourself in the camp where you want to sell and move to cash take a moment and look at the chart attached above. The markets will recover, the process might be painful but making rash and emotional decisions will never get you to your goal. If you have an allocation or investment policy in place remained focused on it! Don’t become a ‘Chicken Little’ or one of the farm animals that fed into the paranoia that the world was coming to an end. The moral of that children’s story is to think logically and not panic.

 

One thought on “Is this the much anticipated market correction? Is the sky falling?

  1. Pingback: China kicks off 2016 with a New Year’s hangover! | Dear Mr. Market:

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