Wealth & Pension Services Group
William Kring, CFP, AIF - Chief Investment Officer
Market Update 2018
As everyone knows, we are in the midst of a market correction. Since it has been so long since we've had one, I thought I would take a moment to add some context to the current situation.
The markets have been moving upward in a very steady fashion for months. We've been overdue for a correction for over a year. So, finally, it is here. The news outlets, to get your attention, like to focus on how many Dow points the markets have lost. Points do not equal percentages. And a Dow point isn't what it used to be. It takes almost three hundred points to equal just one percent. Yes, a thousand points or more is still a lot, but sometimes corrections come long and slow, and sometimes they come fast. Personally, I'll take the fast version, like 2016 when stocks corrected about 13% and came all the way back in the same quarter.
Of course, we have to ask why the market is correcting. It is difficult to know the exact trigger in these sell-offs, but we can point to rising wages (read inflation). Inflation would mean the Fed is behind in their tightening schedule. This, along with rapidly rising yields on Treasuries over the last week most likely started the move, and computers did most of the rest. The good news is that the investing thesis remains the same. We have good growth and profits, no recession looming, and stocks have better valuations. Also, with quick sell-offs, short-term investors are usually the first to go, and the lower prices make good entry points for new buyers
So, all in all, this is just a regular part of the investing cycle. If the market sells off hard again today we will have had a full correction (more than 10% from peak). A correction happens on average about every year. In fact, over the last 37 years, the average intra-year decline from peak to trough is 14.1%; that includes 29 years when the markets finished positive. If you own a mix of stocks and some bonds, another 4% down today would take you to being down only about 4% for the year. That is a minimal loss on the back of last year's gains. Looking back one year, returns would still be positive in the double digits.
Expect the rest of the Winter to be volatile, and this Spring should look different. For now, unless something has changed, this market is investable.
Source: JP Morgan Asset Management - Guide to the Markets