Making Sense of Friday’s Market Decline

By Ronald W. Rogé, MS, CFP®
Chairman & CEO

On Friday, February 2, the stock market declined approximately 2.2%, a sharp reversal from the broad-based advance of the past year.  The Dow Jones Industrials Average is still up 27% over the past year. We have had positive stock market returns with low volatility for over a year now, so people become complacent and forget about possible corrections in market direction and a big day down seems to suddenly get their attention.

It’s anyone’s guess as to why suddenly, the market decided to decline over 600 points on Friday.  Here are a few reasons from the pundits:

  1. Fear of rapid growth in the economy.
  2. Fear of rapidly rising interest rates by the Federal Reserve to try and slow the economy’s growth.
  3. Unemployment is at an all time low, putting pressure on wage inflation.
  4. The President’s state of the union address.
  5. A Fed Reserve report that they are expecting a 5% Gross Domestic Product (GDP) report for the first quarter of 2018. Which would be a very big jump from a more normal 3% growth. Warning, GDP reports are always subject to revision after they are officially announced.

The list can go on and on. It’s probably a combination of all the above reasons and more, but no one knows for sure.

What we do know:

  1. The economy is growing nicely.
  2. Unemployment is at an all-time low, U.S. jobless rate now stands at 4.1%, the lowest since 2000.
  3. There hasn’t been any sign of higher inflation, because there are still tremendous deflationary pressures around the world, caused by advances in technology, medicine and demographics. Inflation today in the U.S. is still not as high as the Federal Reserve Board wants it to be.
  4. The new tax law is a positive for corporations helping them improve their earnings. Earnings are what drive the stock market. In addition, many individuals will benefit from the lower tax brackets putting extra cash in their pockets to spend or save for their future.

While no one knows for sure how long this, or other, corrections will last, selling in anticipation of a bear market has never been a wise investing strategy, even though stocks are admittedly still priced higher than they have been historically. Why? Because you must make two perfect timing decisions.  When to get out and when to get back in.  Virtually, an impossible task.

What is the best academically proven and field-tested investing strategy? It is the proven methodology of defining your goals, risk tolerance, time horizon for those goals, then building a portfolio that meets those needs.  Along the way, rebalance that portfolio when one asset class increases or decreases at least 5% or more.  This allows one to sell one asset class while it’s high and buy another asset class when it is low.  It also maintains the individuals risk tolerance, since the act of rebalancing does not let the portfolio’s volatility migrate away from the client’s risk tolerance.

The S&P 500 has now officially ended its longest streak without a 3% drop in its history.  The truth about the markets is that short, sharp pullbacks are inevitable and routine.

We expect that there will be more volatility over the next few days until things settle down and clearer thinking is applied to the real state of our economy.  Going forward, expect to see more backing and filling (ups and downs) as Wall Street likes to call it.

Our clients can rest assured that their portfolios are not 100% invested in the stock market.  All our portfolios have an asset allocation among stocks, bonds and cash to help mitigate the portfolio volatility in anticipation of day like Friday. All our clients have a custom designed portfolio based on their individual goals, time horizon, risk tolerance and tax situation.

If you would like to discuss your portfolio, financial plan, or life situation, you know you are always welcome to give us a call at 631.218.0077. We are here to listen, advise, coach and educate.

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