January 8, 2019
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The end of 2018 has not been pleasant for investors. Fears of weakening global economy, trade issues and rising rates have lead stock markets around the world to nosedive.
The S&P 500 index has dropped near -19.8% since September 20th, erasing all gains for the year and bringing the 2018 S&P 500 stock market returns to -6.24%. Such declines can be painful and lead us to a false and emotional conclusion that this decline must continue for a long period. But history, statistics and the data all point toward a different conclusion.
Some Recent History of the Machine Panics
At first glance this decline seems very similar to the large decline from December 29th, 2015 to February 11th, 2016, when the S&P 500 dropped over -12% in a very short time. Both declines corresponded with technical price level changes. We saw the market move below the 200 day moving average and we have seen the 200 day moving average cross below the 50 day moving average. Many electronic trading algorithms on wall street have been set up to trigger a sell when these things happen. In our world of automation, index investing and quantitative hedge funds; temporary sharp declines should be expected from time to time. It is probably safe to say that the machines are in panic mode. But do not forget, these triggers will work both ways and once we see the moving averages flip (which they eventually must) we will see the same formulas move to a fast buy signal and drive markets up very quickly. This occurred on roughly February 25th, 2016 when we saw the S&P 500 cross back above the 200 day moving average. From that point, we saw the market return over 50% until the recent declines. Once the machines stop panicking we might see a nice rally. Based on our estimates, it will likely take around 3-5 months of bouncing around before we see strong renewed buying interest. However, baring any recessionary data, the buying interest may prove very strong at such time and drive markets again to new high water marks similar to the rally we saw in 2016.
Pullbacks are Normal
Regardless of the reason, pullbacks have always been a normal part of long-term investing. It is the reason we spend so much time making sure we align your risk before we start investing. When viewed in a historical context, these declines are not unusual at all. During the past 10 years, the S&P 500 has gone down by more than 5%, 13 times. 9 of those times it declined more than -9%. And 4 of those times more than -15%.
It is true that sometimes these stock market declines can herald more losses to come. But more often than not the market rebounds back to normalcy in fairly short order. We have found the best course for any investor is to stay invested according to your plan and set risk tolerance. Leave the panic up to the machines.
Meanwhile, we are excited at these times and the opportunity it is now creating for trade and rotation. We can get some investments we really want at a really good price. Our management has historically added the most value through periods of turbulence and we will stay the course and capture some opportunity as long as markets continue to act crazy.
Conclusion – Always Take the Long View
Look past short-term price levels and focus on the real long-term business and investment values. Any other perspective is not investing, its speculating. Any movement in or out of markets based on price blips is not investing. Would you sell your house, rental property or farm because your crazy neighbor yelled out a price he was willing to give you that was absurdly low? If so, please call me and I will make you an offer. As of year-end (time of writing this), the S&P 500 has grown 175% for the past 10 years. That equates to an average annualized return near 10.60%. I know of no other universal means to wealth that take such little effort as allowing time, companies and compounding interest to work magic. The only effort required was either a willingness to ignore the emotions, headlines, predictions and ups and downs for 10 years OR an ability to filter the white noise properly. It is our firm belief that avoiding emotional decision-making remains the greatest advantage any investor or advice giver has to generate sustainable lifetime wealth.
*Results mentioned were taken using our model portfolios and client accounts at Folio Institutional. You should login to your own account to view actual results specific to your accounts. Results are given only for guidelines and discussion.
Index results such as the S&P 500 do not reflect management fees and expenses and you cannot typically invest in an index
Evergreen Wealth Management, LLC is a registered investment adviser. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Past performance is not indicative of future performance.