As this week comes to a close today (Friday, February 28, 2020), the U.S. stock markets have fallen approximately 11.5% in only a week. It has been the worst week for U.S. equities since the financial crisis, and it has also been the fastest we have ever seen a 10% correction occur. That naturally causes concern for stock market investors. It’s common and normal to feel concerned about your investments.
What’s going on? At the forefront is the news that the Coronavirus continues to spread globally. The story about the virus is evolving, and there’s a lot we don’t know. Something we do know is many public companies have stated it will cause short-term disruptions in business. The CDC has warned that the virus will likely spread to the U.S. The news on Thursday, February 27 included a story about a case of the virus showing up in California without a tie to an existing outbreak. That news alone contributed to stocks’ declines late this week.
The uncertainty combined with the aggressive media coverage of the Coronavirus is enough to make even the most prudent investor question things. Moreover, this is an election year. That in and of itself is heating up stock market volatility.
We aren’t naïve to the emotions that rise in the midst of uncertainty, especially when it comes to money. With that said, we are long-term investors. Therefore, what we do is focus on the longer view. We don’t invest based on days, weeks, and months. Rather, we invest for many years at a time.
The stock market does not move in a straight line. Stocks are volatile in the short term, but long-term returns are efficient. We don’t invest on what we think will happen day-to-day; in fact, we invest knowing there will be volatility.
A correction of 10% or more each year is very common. According to JP Morgan Asset Management, the average intra-year drop in the stock markets has been 13.8% per year since 1980. Even with the annual pullbacks in the stock markets, the markets have still finished positive in 30 out of 40 of those years. Also during that timeframe, markets have never finished the year at the low point of the year. So, as we see it, this market correction seems somewhat normal, especially when it has been over a year since the last correction (4Q 2018).
During periods of volatility, a natural response can be to sell out of your riskier investments and seek safety in safer investments or cash. Unfortunately, this can be a big mistake because more than half of the market’s best days come right on the heels of some of the worst days. Trading around volatility is not a prudent strategy. It’s more like chasing your tail! Goldman Sachs research says that stocks spend three times as much time going up than down, and we’ve had plenty of up days over the last few months and years. This again points towards this correction being historically normal.
Diversification, rebalancing, reviewing risk tolerance and time horizon, having available cash, etc. are strategies that help weather the short-term volatility storms. That is how we invest at BCS Wealth Management. A long-term approach coupled with these strategies gives us confidence in the face of uncertainty.