I love roller coasters. Every once in while though you walk up to one and wonder….”what am I doing that thing looks terrifying.” Sometimes the market reminds me of just that. The beginning of this year hasn’t been fun. It’s not just that we saw a quick decline from the start of the year, it’s the crazy intraday swings, both good and bad, that have made it even more unfun. So what’s wrong? Well, nothing really. The market is acting like….the market. In my last blog I mentioned we didn’t experience a correction at all in 2021. Luckily, I jinxed us into checking that box early in 2022 for both the S&P and NASDAQ. Markets are unpredictable. They tend to move in directions opposite of what you think the news might be telling you. They remind me of my 16 year old son in that regard as he just got his permit.
Here are some statistics from Ben Carlson over at Ritholtz Wealth:
Since 1950, the S&P 500 has had an average drawdown of 13.6% over the course of a calendar year.
Over this 72 year period, based on my calculations, there have been 36 double-digit corrections, 10 bear markets and 6 crashes.
This means, on average, the S&P 500 has experienced:
- a correction once every 2 years (10%+)
- a bear market once every 7 years (20%+)1
- a crash once every 12 years (30%+)
These things don’t occur on a set schedule but you get the idea.
As always there are reasons we think markets are moving. First and foremost are the coming rate hikes by the Fed designed get a handle on what was once called “transitory” inflation. It’s no longer transitory as my Wawa coffee is approaching Starbucks prices. We have geopolitical tension on the rise with the Russia/Ukraine crisis. The political climate in the country stinks and it doesn’t matter what side of the aisle you’re on. As I have said before, throw a dart at any month and year and insert potential crisis here.
Here is some interesting data from LPL via FactSet Research that looked at previous rising rate environments:
LPL Research looked at major extended periods of rising rates dating back to the early 1960s. We found 13 periods in which the 10-year Treasury yield rose by at least 1.5%, a move the current increase hasn’t even reached yet. These rising-rate periods lasted between six months and almost five years, with the average a little over two years. In nearly 80% (10 of 13) of the prior periods, the S&P 500 Index posted gains as rates rose, as it has so far in the current rising-rate period. In fact, the average yearly gain for the index during the previous rising-rate periods, at 6.4%, is just a little lower than the historical average over the entire period of 7.1%, while rising rates have been particularly bullish for stocks since the mid-1990s.
I have had numerous conversations over the last few years with clients concerned that markets were at all-time highs. It’s a legitimate question that I enjoy talking through when it comes up. Guess what? The markets aren’t at all-time highs right now! Is this a buying opportunity? Maybe. I can tell you in my personal account I moved some money in on last Tuesday after lunch and thought I was brilliant. Then the market slapped me in the face the next few days to remind me I am, in fact, not. However, I still view those purchases as buying at a discount regardless of whether I see continued movement down after the trade. I didn’t move all my free cash in, I stuck to my rules and moved in some. If I continue to see drops, I’ll buy in at another discount.
Another thing to keep in mind is that your personal investment portfolio rarely, if ever, moves with the headline S&P number. As you have heard me say too many times, diversity and your personal time horizon have dictated the investment we have put together. Very few of you reading this are invested 100% in Large Cap US companies. That diversification can provide a cushion when one particular sector of the market is in free fall. As an example, Emerging markets were still running in positive territory just last week.
So here’s my advice. First, call me with specific concerns with regards to your portfolio. Even if it’s a conversation to reiterate what your money is invested in along with the intended time frame; a call like that can go a long way in alleviating fear. Second, remind yourself that this is what markets do. Contrary to what you heard from people like Dave Portnoy and some of the meme stock dopes on Twitter, stocks don’t always go up. It would be a lot better if they did, but sometimes you just have to ride the roller coaster.