When you’re a doctor, you’ve surely had your fair share of “deathly” illnesses that turned out to be a common cold. Dentists run into more than enough toothaches that represent the patient’s “worst pain they’ve ever felt in their lives.” Most of us have been on a flight that experienced some turbulence that (at the time) felt as if it could turn the plane into a lawn dart.
In my world, there are a handful of times each year when we hear from our clients due to the most recent drop in the stock market – and in each of these instances, it feels like a catastrophe at the time when in reality, it’s just a regular, run-of-the-mill, apocalypse du jour. The trick is to “scan out” so that you can clearly see the difference between a disaster, and a mere blip on the radar. Allow me to put things into perspective…
First off, the market goes through roughly three 3-5% “pullbacks” per year, on average. We’re almost one-sixth of the way through the year, and this week marks the 1st of 2020. You can see (below, in the chart from my friend Ryan Detrick, CMT) that:
Secondly, it’s also important to understand that the market goes through one “correction” per year, on average. If we dig deeper, we find that the average intra-year market correction is around -14% (half are better, half are worse). However, there are more times than not when:
Third, not to get into politics, but we are living in an election year, which carries the 2nd best average historical performance of the 4-year election cycle (with the pre-election year – which was last year – being the top-performing of the cycle).
As you can see below, the stock market has been negative in only three Presidential election years of the 17 that have occurred since 1950:
Lastly, looking at the “big picture,” the market breathes – it doesn’t go up in a straight line. As mentioned earlier, it stumbles about three times per year, it falls and gets right back up about once per year, but the big, catastrophic, life-changing crashes only come around about once every seven years. Granted, we haven’t seen more than a -19.9% drop in the S&P500 in more than 11 years, but I digress.
As I “scan out,” I see a market that is stumbling, and one that might even fall down. But I don’t see a crash developing in the next six months, especially not prior to the election. Granted, there is always the risk that the coronavirus could turn into something much more serious, which could cause some problems… and there’s always risk of a geopolitical event, but we live with that risk every day. What’s most important is paying attention to the market, its trend, and investing with (not against) the prevailing trend.
So far, this market pullback is just that – a “pullback.” If it starts to develop into something worse… something that pushes the trend negative, after which the market pushes decisively into my “red zone” above, then I’ll be aggressively putting the offense on the bench, and putting the defense on the field.
In closing, always remember that market crashes always start with a pullback and then a correction before they turn into full-blown bear markets. But this process takes months, not days!
So keep perspective, be patient, and make sure you’re investing with the trend!
Till next time…
AdamCategories: Adam Koos, CFP®, CMT®, Market Commentary