I hope that by the time you’re reading this, the majority of the stock sell off has occurred. Of course, we may still have a few more storm clouds to weather. And that’s ok. The financial media is already using their platforms to sound the alarms because, for them, this is Christmas in February. Over the last year and a half, the market has move upwards—slow and steady—with little angst or volatility. Now that we have some serious selling action, they all get a chance to preen and tell us how much smarter they are than all of us.
Don’t buy it.
Market corrections, like this one, can be scary. However, they also serve a great purpose— to shake out the weak hands, clear out over hedged players, and (to be honest) keep the rest of us on our toes. If you’ve sat in investment meetings or presentations with our team, one of my favorite statements to make is in reference to how quickly the market can take away our gains. For instance, we had an amazing January—with equity portfolios seeing 5-7% growth in a single month!! Now, those same portfolios have given back those gains in a matter of days.
To quote one of our clients “Ramp Up is nice. Ramp Down is horrid.”
The truth is that corrections are normal—but I feel that some additional explanation may be in order about what’s going on and why. Here’s my list of a few possible reasons—none of them alone would drive this downturn (in my opinion), but when taken together…
- We are way overdue. Human emotion and behavioral biases still hold significant sway over market movements. In the last several weeks, I have heard multiple remarks about the market and it’s recent run. The more frequent the remarks—the more diverse the types of investors that make them— this usually a sign that we probably have people taking risks they shouldn’t be taking. These folks are the first to sell once we see volatility pick up.
- Technology. With the ever-increasing ability of investing algorithms to run portfolios without a human touch, we are now seeing how quickly the automation can impact investors during volatile trading days. If the algorithms are programmed to sell after a 5% drop, they WILL sell —no matter what is going on. A large percentage of trading these days is done with algorithms, and I think that big swing days in the markets could be a new component of the investing process for years to come.
- The Gimmick Portfolio. With technology comes its uses—and its abuses. The investing world is no different. Despite the fact that there is no research that can validate anyone’s claim to being able to sell out of the market at “just the right time” or invest in “just the right” stocks…there are still salespeople out in the marketplace trying to push these types of strategies on investors. These strategies sound so good…so perfect… but it’s been my experience that they are nothing more than a bag of onions being paraded around like a bag of apples. There is no free lunch in the investing world— and these types of strategies can bite you in times of volatility. We are likely seeing some of that play out at the moment.
- The Federal Reserve. The new chair, Jerome Powell, was sworn in yesterday. Having the Dow drop over 1100 points on your first day isn’t the greatest first day at the office, huh? What may have started this turn in equities is the idea that the Federal Reserve may decide to deviate from their 3 scheduled rate hikes this year—and possibly add a 4th. While there has been nothing substantial said about this becoming a reality, we always see a little shuffling of the deck if something unexpected arises. If this indeed proves to be the catalyst, we will likely be looking back in a few weeks at this market tantrum wondering “what they heck was that all about?”
These are some of my opinions, and I believe that many other financial professionals share them since I’ve yet to see anything concrete come out about why we are seeing this correction. Considering that the majority of economic news we’ve been getting— unemployment numbers in January were great, corporate tax cuts triggering reinvestments in our country, wages ticking upward, and GDP accelerating— we haven’t seen any data that points to the party being over. So, for now, consider this just par for the course with investing. We have to be able to withstand some downturns. In fact, dare I say that having a correction can be healthy for the bull markets?
Remember, we always work within the context of a plan. We plan for not only the good times—but also the scary times. That way, when we do see volatility rise against us, we can hold the line.