By Ryan P. Johnson, CFA, CFP®
Director of Equity Research
Yesterday’s sharp moves in equities and continued declines shown prior to the open today have investors wondering what to expect next. Is this the beginning of something much worse or a buying opportunity for those who have been sitting on the sidelines? For long term investors, we believe it is important to remember:
- • Including yesterday’s decline, the S&P 500 is down less than 1% on a total return basis for 2018.
- • Interest rates have been moving up, but the Fed has been increasing rates for the right reasons. They are gradually moving monetary policy back to a neutral rate thanks to the tailwinds of a stronger economy, low unemployment, and new fiscal stimulus.
- • The fundamentals remain very strong (earnings are expected to grow significantly in 2018: 16% as of late January), but momentum and sentiment indicators had recently reached record levels.
- • We had gone over 400 trading days (a record) without the S&P 500 being more than 5% away from recent highs, (there was never a pullback in 2017).
- • We had record 14 straight months end with gains.
- • Pullbacks (declines greater than 5%) and corrections (declines greater than 10%) are a normal part of markets; we just have not had one in such a long time that it feels worse.
- • Dow points are less relevant as the market moves higher: the 508-point drop in 1987 was a down move of over 22% in one day. Yesterday’s 1,175-point drop was 4.6%.
- • The rapid moves seen over a very short interval reflect the technology-supported era in which we live. The mechanical, computer-assisted trade programs which get triggered by technical moves have made market timing an even riskier strategy.
It is completely normal to feel like you want to do something, but now is not the time for emotional reactions. We have been regularly rebalancing portfolios and sticking with the long-term plans of our clients. Stay the course.
RISKS AND IMPORTANT CONSIDERATIONS
Views and opinions expressed here are for informational and educational purposes only and may change at any time based on market or other conditions or may not come to pass. This material is not a solicitation to buy or sell securities and should not be considered specific legal, investment, or tax advice. The information provided does not take into account the objectives, financial situation, or particular needs of any specific individual. All investments carry a degree of risk and there is no certainty that an investment will provide positive performance over any stated period of time. Equity investments are subject to company specific and market risks. Equities may decline in response to adverse company news, industry developments, or economic data. Fixed income securities are subject to market, credit, and interest rate risks. As interest rates rise, bond prices may fall. Past performance is no guarantee of future results.