A note to our clients and friends.
In light of the steep decline in the markets over the past few days, followed by today’s dramatic rebound, we recognize that the wild market swings and volatility can be unnerving. We therefore want to reach out to you to share our perspective.
As we have written many times in the past, corrections in the stock market are a normal occurrence. If we look back 38 years to 1980, the stock market has experienced a decline every year, and the average decline each year was just under 14%. Yet in 29 of the 38 years, the market ended positive for the year, and over the full span of time, including market crashes, recessions, dot-com bubbles and busts, credit crises, the stock market appreciated over 6,750%, or about 11.8% a year.*
Corrections also tend to be healthy for markets in that they help to drive out complacency, “animal spirits” and speculative behavior and realign prices with fundamentals.
That being said, corrections, like hurricanes and tropical storms may be normal and even healthy occurrences, but they are never fun when you are in the middle of one. Especially if you turn on the television and expose yourself to all the short-term noise and drama. It is easy to lose perspective and want to sell everything and hide in the basement. This has historically been the wrong thing to do. After sharp declines, markets tend to experience sharp rebounds.
We do not know what triggered the recent decline in stocks, but as we wrote last month, we thought that markets were overdue for a correction. We have not had a meaningful correction in two years, while stocks prices and valuations have climbed higher and higher. Investing is not a risk-free proposition or a one-way street. The history of markets is one of advances and declines, but with the advances far outweighing the declines over time. This is why it is so important to invest with a long-term approach and time horizon and to not get too caught up in the day to day gyrations of markets and commentary.
We have noted in the past that the stock market has not typically experienced a major decline without a recession and we currently do not foresee a recession. In fact, the economic news and fundamentals are very favorable, not just in the U.S. but around the world, and the new Tax Bill should add significant additional stimulus to the U.S. economy. Unless there is a meaningful deterioration in economic data, or some other geopolitical event that changes circumstances, the current sell-off is likely a normal correction rather than the start of a new bear market. And, if it is not already over, it is most likely almost over.
The markets may remain volatile in the coming weeks, but with solid economic fundamentals, stocks still represent the most attractive asset class for long-term investment. This reality should provide stability and support for the markets once the current storm-clouds part as they inevitably will.
At the moment we do not anticipate making any major moves in client portfolios. We already took steps last year to reduce risk given market valuation levels, and despite the recent sell-off and rebound, stock markets are basically back to where they were at the beginning of January. If markets declined significantly further, then we would start to increase our equity exposure but for now, we feel comfortable with how portfolios are positioned. They are very diversified, globally and across asset classes, and designed to weather volatile markets without requiring much, if any, adjustment.
As always, we are here to offer help and guidance so if you would like to discuss this note, the markets or your portfolios, please do not hesitate to call us.
On behalf of all of us here at Jurika, Mills & Keifer, thank you for your ongoing trust and the opportunity to serve you.
Karl Mills, CFA
President & Chief Investment Officer