We’re preparing this brief report to hopefully calm some nerves in light of the market’s activities over the past week. We will provide a more comprehensive summary as more details come available in coming days. Each day, we’re talking with research analysts, portfolio managers, and economic advisors, and we’ll share their insights with you.
First off, market contractions are neither fun nor predictable in their timing or frequency. We’ve noted in past commentaries that we haven’t had a normal market correction in more than three years, and we’re in the sixth year of market expansion since the recession. We’ve also been preparing clients that – sooner or later – markets will contract like they always have and always will. Well, it’s here. So what should you do about it now? Read on.
Whether markets gradually decline over a period of months or rapidly decline over a few days often tells us a lot about what’s causing it. The contraction of the past week has happened swiftly. Something must have changed, right? Is the economy in a tailspin? Did war break out? Did a bunch of banks fail? Of course the answer to all these questions is “NO”. In fact, there hasn’t been any significant new news or a world-shattering event to cause such a swift decline. So what’s the deal?
The current decline is based on both negative sentiment and media sensationalism, not on market or economic fundamentals. And sentiment only has two speeds – fear and greed. Sentiment is not based on boring logical things like earnings, corporate health, and general economics, but on fear, panic, greed, and other emotional elements. As a result, it can switch directions at any time with no warning, notice or reason. For long term investors, that is not a place you want to make guesses about getting in, getting out, or “doing something” just to be doing something. That’s what day traders and speculators and program traders do, and it’s like picking up nickels in front of a bulldozer. Investing, on the other hand, involves long-term thinking about fundamental factors, like profitability, new technology, or serious policy changes. The consensus among experts is that negative sentiment on global economic softening, China worries, commodities weakness, and Fed uncertainty have been pooled and therefore amplified the current contraction. You’ll note that none of these are new. Thus, sentiment is the culprit.
So let’s look at fundamentals. Set aside your emotional concerns about today for two seconds. As far as fundamentals are concerned, private sector jobs have increased for 65 consecutive months, there is unambiguous improvement in housing and construction taking place, and auto sales are near record highs, and rising. Yes, it’s Plow Horse growth, but profits, outside of energy, continue to grow. And this correction will make stocks globally (and more specifically in the US) more attractive for long term investors.
There is obviously no way to predict or determine how long this current environment will persist. And it’s perfectly natural and normal to become uncomfortable. But it is imperative for long term investors to focus now on what they can control – not what they can’t. You can’t control market returns in the short term. You can control how much risk you’re willing to accept in a long term portfolio that’s designed to meet your long term needs. You can also remind yourself that corrections are normal and natural. The price we pay for long term advances is temporary declines. Finally, you can remind yourself that exactly 100% of every past market correction ended with markets moving to new highs when they were over. We just don’t know long the advances or declines will last in the short run. If you have any doubt as to this, here’s a handy little chart that reflects some great information regarding past declines, how often they occur, and how long it takes on average to recover.
If you have any questions or concerns, please don’t hesitate to call us and talk. We’re here to listen and the help you make smart decisions. And stay tuned for more frequent updates as they become available over the coming days and weeks. We’ll stay in close touch.