The markets have been volatile -- to the downside; who minds upside volatility, right? -- to start 2014. The S&P 500 was down -3.46% for January and the MSCI All Country World Index -- a good barometer for the global equity markets -- was down -4.00%. This was enough to cause pundits
and investors to ask whether we are now in the early stages of a bear market
or, indeed, if the past almost-five years should be considered an interim
market rally inside of a longer-term bear market.
The answer, of course, is that nobody knows--not the brainiac Fed economists, not the fund managers and certainly not the pundits. A Wall Street Journal article noted that most of the sellers were short-term investors who were involved in program trading, selling baskets of stocks to protect themselves from short-term losses. Roughly translated, that means that a bunch of professional traders panicked for example when they learned that Chinese economic growth is slowing down on top of worries that the Fed is buying bonds at a somewhat less furious rate ($75 billion a month vs. $85 billion) than it was last year.
What we DO know is that it is often a mistake to sell into market downturns, which happen more frequently than most of us realize. A lot of people might be surprised to know that in the Summer of 2011, the markets had pulled back by almost 20%--twice the traditional definition of a market correction--only to come roaring back and reward patient investors. There were corrections in the Spring of 2010 (16%) and the Spring of 2012 (10%), but almost nobody remembers these sizable bumps on the way to new market highs. Indeed, most of us look back fondly at the time since March of 2009 as one long largely-uninterrupted bull market.
Bigger picture, since 1945, the market has experienced 27 corrections of 10% or more, and 12 bear markets where U.S. equities lost at least 20% of their value. The average decline was 13.3% over the course of 71 trading days. Perhaps the only statistic that really matters is that after every one of these pullbacks, the markets returned to record new highs. The turnarounds were always an unexpected surprise to most investors.
We may get a full 10% correction or even a full bearish period out of these negative trading days, and we may not. But the history lesson suggests an important lesson: if we DO get a correction or a bear market, we may not remember it a few years later if the markets recover as they always have in the past. The people who lose money in the long term are not those who endure a painful market downturn, but the people who panic and sell when the market turns down.
It is most likely wise to temper market expectations as many asset types still look expensive. (See: Investment Returns: What Should We Expect Going Forward?) Expected returns whether rich or more modest will be realized over time. Short-term market movements are impossible to predict. Mistaking activity within your investment accounts gives the illusion of control but most often at the expense of realizing less than the expected returns the market will bear to the patient.
To Your Prosperity,
Kevin Kroskey, CFP®, MBA
This article adapted with permission from Bob Veres.
Sources:
http://finance.yahoo.com/blogs/the-exchange/stocks-plunge-in-u-s---dow-sinks-more-than-280-points-205935575.html
http://www.bloomberg.com/news/2014-01-16/crashes-corrections-and-monday-s-bear-market-.html
http://www.bloomberg.com/news/2014-01-23/the-bull-market-ends-or-is-it-just-a-correction-.html
