Q and A: Perspectives on the Current Market Environment

In our never-ending effort to help investors make smart decisions and avoid costly mistakes in the shepherding of their assets, we thought it might be time to offer a little Q&A on the current state of things and answer some of the questions we’ve received. Note that these are all real questions from clients over the past few weeks. Here we go:

Q: So, what’s happening with the stock market? Why do things suddenly seem so crazy?

A: It’s a two-part answer. First off, markets respond to news and events as they occur. Reasons given for the latest activity range from a rise in interest rates to slowing sales in homes to a softening economic outlook. There’s also the theory that US investments got a bit ahead of themselves relative to valuations and we’re experiencing the self-correcting nature of markets. So, take your pick. The truth is that the future short-term direction of the markets is fundamentally unknowable and unpredictable.

The second answer is – this isn’t really that unusual. It’s just been a while since markets have exhibited this level of daily volatility, so investors get lulled into a sense of slow and steady market behavior and expect that it will continue indefinitely. Well, it doesn’t. To show you what we mean, take a look at the chart below. It reflects the number times the market has experienced a 5% or greater pullback each year since 1928.

Source: Standard & Poor’s, FactSet, J.P. Morgan Asset Management. For Illustrative purposes only. Returns are based on price index only and do not include dividends. Data are as of 10/24/2018.

You’ll notice that it’s been relatively quiet the past couple of years compared to history. So markets aren’t really behaving any differently than they have throughout time. It just feels like they are because it’s been a while since we’ve experienced it.

Q: Is this the end of the bull market? Is a recession coming?

A: No one knows for sure, but we don’t think so. The consensus among some pretty smart analysts suggests that the economy is still expanding, and that markets may still have some room to run. But there are some headwinds. For one, this is the longest economic expansion on record. And some of the leading economic data regarding housing, etc., has softened a bit. But none of this suggests a recession is right around the corner. While we’re on the subject, it’s helpful to remember that “normal” recessions aren’t that painful and are a normal part of the business cycle. But most people don’t remember the last normal one. Want a hint? It was 1990 and lasted about 8 months. The last two recessions were caused by severe event shocks – 2001 was the dot-com bubble and 9/11, and the 2008 recession was caused by the Financial Crisis. (They lasted 8 months and 18 months, respectively.) Point is – recessions are normal, and diversified portfolios are designed to weather them accordingly.

Q: When will things calm down?

A: A great question. Unfortunately, there’s no easy answer. Market corrections vary in length and depth, and there’s no reliable way to forecast it. What we do know, however, is that all of the market pullbacks throughout history do in fact end. And then markets begin their inevitable march upward. Here’s another handy chart reflecting a history of average market pullbacks, their frequency, and how long they typically last.

At the risk of repeating ourselves, it’s comforting to remember the following: Every single market pullback in history has ended. And then markets have ultimately advanced to new highs. Every. Single. Time. What we do not know is how long it takes for things to settle down and how long it takes for markets to begin their inevitable march upward. But if you plan to be around a while, a 100% track record of recovery and advancement is tough to bet against. It’s no fun living through the downturns, but the price we pay for the advances is the declines. If the declines went away, so would the advances. So, take a deep breath, and keep reading.

Q: I can’t help it – this makes me nervous. What should I be doing?

A: We know. Markets going up dramatically one day and down the next is no fun to experience. And it’s perfectly natural to feel unsettled about it. But there’s a big difference between feeling nervous and acting on it. If you’re properly diversified (which you all should be if you’ve been reading our commentaries), the best thing you can do is nothing. By taking action (i.e., panicking out and selling everything), you are assuming you know something about the future that no one can possibly know. A diversified portfolio is designed to weather these storms.

That doesn’t mean you don’t experience temporary portfolio declines – everyone does. But trying to time the markets ups and downs is a fool’s errand. It simply cannot be done. Need proof? Over the past 20 years, the 10 best days in the market have occurred within two weeks of the 10 worst days. In 2015, the best day for the market (August 26) occurred just two days after the worst day (August 24) *. Jumping ship when the outlook is bleakest is often the wrong decision.

Q: Then what should I be doing now to keep my blood pressure down?

A: Excellent question. First, separate out the things you can control from the things you can’t. You can’t control markets. So just accept that. But you can control how you allocate your investments to give you the best opportunity to achieve all your goals over time and to live with the inevitable ups and downs that markets deliver. That should immediately provide some relief. If you suspect that your tolerance for short term fluctuations has changed, call us. We’ll work through it with you. Second, remind yourself that all the fluctuations – no matter how troubling – are temporary. In 2008, it seemed like the world was ending. It didn’t. For those who had the fortitude (and heeded the guidance of their stalwart financial advisor, ahem) to stay the course, they not only survived, but recovered and created more wealth than they had before the financial crisis. By simply doing nothing. That’s a powerful lesson.

Q: Should I be investing more money now while things are down?

A: We love this question. It shows us that people are listening. If markets have historically advanced 100% of the time after they’ve declined, then logically you’d want to buy more when prices are lower. Call us and we’ll discuss a strategy to do so.
In closing, we offer the following pearls of wisdom based on 35 years of counseling clients through much worse markets that this: Stop paying attention to the daily news reports. It does you no good. If you’re properly diversified based on your tolerance for these short-term hiccups and you’ve allowed us to prepare a weather-proofed retirement plan for you, then you’ve done the right things. You’re controlling all you can. Go work in the garden. Or take the cruise you’ve been planning. Or entertain the grandkids. In the end, this will be nothing more than it’s ever been – a speed bump on the road to a long and comfortable retirement.

And don’t hesitate to call if you’d like to talk more about this – that’s why we’re here. We’ll keep posting these updates as conditions dictate.


Your First Coast Wealth Advisors Team
Disclosure: This information is provided for general purposes and is subject to change without notice. The information does not represent, warranty or imply that services, strategies or methods of analysis offered can or will predict future results, identify market tops or bottoms or insulate investors from losses. Asset allocation and diversification do not ensure a profit or protect against loss in a declining market. Past performance is not a guarantee of future results.
Securities and Advisory Services offered through Geneos Wealth Management. Member FINRA/SIPC.