Perspective on the Market
If you’re hearing the stock market news and thinking, “If I call, my planner is just going to tell me I’m well-allocated and to stay focused on the long-term, but boy that is a big drop”, you’re both correct and not alone. Downward movement in the market can be difficult to bear after we’ve enjoyed such a long period of relative quiet and strong returns. For some, the market activity of the past week is bringing flashbacks to 2008.
It’s important to keep in mind that managed portfolios are typically diversified, and contain a mix of stocks/equity and bonds, cash and alternatives. Within the equity component, there are US stocks as well as international. When you hear the news of the market dropping, it is only one sector of the market. The reason we use so many different asset classes is to give our clients exposure to categories that don’t all rise and fall at the same time. While the S&P 500 declined 4.1% on Monday, there was an equally remarkable rise in the yields on 10-year US Treasury bonds to 2.85%. That’s hardly generous but well above the record lows just 18 months ago. In addition, gold rose 0.25%.
The market drop is not as dire as it may seem, either, when viewed on a relative basis. If a 1,000 point drop in the DOW had happened in November 2016, it would have meant a 5.5% decline. But now, from the recent market high, a 1,000 point drop is 4.6%. Roughly 1% less for the same 1,000 points. A 10% drop – the definition of a market correction—is normal and on average happens once a year. We haven’t had that kind of adjustment for a while, and we are a bit overdue.
So yes, stay focused. And remember, corrections are okay and part of a healthy market. It’s actually normal to experience some volatility in the markets once again.
Written By Heidi M. Johnson Bixby, CFP®