S&P 500 Closing Value 20180208

It’s hard to avoid hearing the rumbling sound coming from Wall Street over the last couple of weeks. Even news outlets that don’t normally mention market news have spent at least a few minutes on the wild ups and downs – okay, mostly downs – of the major indexes. And although we don’t normally comment on day-to-day market conditions, this has been dramatic enough to warrant discussion. So … what’s going on?

Over the last couple of years, the US stock market in particular (which we normally represent with the S&P 500 index) has been marching steadily upward. The broad economy’s recovery from the last recession has been weak, maybe even anemic, but corporate profit levels have been setting new records. The stock market has loved that, setting new records of its own. After the Republican tax plan was passed in December, the upswing accelerated a bit, in anticipation of even more record profits.

But last week, a small bit of news started an avalanche. Employment and wages data were released, and the numbers were very good – the unemployment rate remains at multi-year lows, and pay rates are rising a little faster than anyone thought. This sounds like good news, right? But some bond traders got worried that low unemployment and high wages might lead to increased inflation, which in turn would probably cause interest rates to rise, so they began selling their current low-interest bond portfolios to get out ahead of that trade. And higher interest rates mean that corporate borrowing is more expensive, and so cuts into those record profits, so a few stock traders began selling too … and then a few more … and we ended up with a couple of days of stunning losses.

Along the way, it looks like some automated trade algorithms started to push and pull the market – trade volume increased, and the indexes spent a couple of days swinging from 2% losses to 2% gains – but sellers returned in force and pushed the markets down much further. As of Thursday’s close, the major indexes were all down more than 10% since their recent all-time highs: technically this meets the definition of a “correction”, something we haven’t seen since early 2016.

Market corrections have, historically, occurred about once a year, averaged losses of a little more than 13%, and lasted about three months. We’ve been telling our clients for the last six months or so that we have been expecting a quick sell-off, pushing the markets into correction territory – though we had no idea quite when it might occur.

And we think that this is likely to be an utterly ordinary correction, with the markets bottoming out 10-15% below their recent highs and recovering within a couple of months. We don’t see any particular reasons to think that the losses will exceed that and head toward “bear market” territory, with losses of more than 20%. Bear markets are normally associated with bigger troubles: an economic recession, for example. The American economy is, currently, relatively healthy and stable by most measures, and doesn’t show signs of slipping into recession in the next year or two. A new war or a major terrorist attack could do tremendous damage to our economy and the markets, but … well, it’s hard to know how likely those are right now, given the general political climate.

So, what do we think you should do in light of this correction? If you have additional assets that you’ve been holding on the side, waiting for a good moment to drop them into the markets, this might well be that moment. We understand that it’s difficult to see the market draw your account value down so suddenly, but generally speaking, we’re recommending that our clients do nothing. If you’re at a point in your financial life when a correction could be a serious problem for you, we will have recommended that you should have a defensive portfolio, one that’s not likely to be impacted by this sort of market gyration. And if you’ve got a long time-horizon ahead of you, your portfolio will have plenty of time to recover from this correction.

That said, if you have specific questions about your particular situation, or general comments or concerns, please don’t hesitate to contact us. We’re happy to help however we can!