Feb 9, 2018

I’ve had two questions all week that are predictable when markets decline.  Why is the market down?  When will it stop?  Interestingly, I rarely get asked the opposite questions when markets are going up.

There are rarely single reasons we can point to that drive markets down.  I realize on CNBC and Twitter they try to boil market corrections down to sound bites, but that’s for media consumption, not investors.  Their comments typically contain a truism, but rarely is it useful other than satisfying the mammalian brain’s need to categorize and rationalize fears.  In reality there are hundreds, if not thousands of conditions which can contribute to a downturn, most of which were probably in place during the upturn.  What changed?  Maybe sentiment.  Maybe a computer algorithm.  Maybe just time. 

After 30+ years I can only remember two instances where a single event drove the market down-September 11 and Long Term Capital Management.  I’m sure there are a handful of others, but hopefully that makes the point there isn’t a single catalyst, but a series of conditions that contribute to a market correction.

When will it stop?  Someone will get it right by predicting a point when selling will stop, and it will be more luck than skill.  When we are down 10%.  When the S&P hits 2550.  When volatility spikes to 50. When cows fly.  Again, it stops when the collective of market participants feels there are bargains, that their portfolios are rebalanced sufficiently, and it’s safe to go back into the market.  Finding or calling a single point, whether it’s a market top or bottom, is certainly the folly of fools. I have yet to see a system that is accurate at calling tops and bottoms.  Many market prognosticators have successfully called tops or bottoms, however, if you look at their records it typically occurs that they held their bullish or bearish stance for years, missing the market moves prior to their call.  In essence they have benefitted from the stopped clock syndrome-a stopped clock is right twice a day.

The chart below shows the S&P 500 over the past five years.  This correction is noticeable, however, we have had an extraordinarily long run in the market.  The unusual action isn’t the decline we’re experiencing, the unusual action is the run from March 2016 until two weeks ago, a time period we didn’t experience a single significant correction.  As I wrote last Friday, I would expect a series of 5% corrections and that we were long overdue for a 10% correction.  Prescient?  That’s doubtful, just lucky timing.  I was the stopped watch last week.

This past week is what a 10% correction feels like.  For any of us, if you feel as though this is too much volatility for you and are uncomfortable with what has happened in your portfolio, it is certainly time to reexamine your asset allocation and de-risk your portfolio a bit.  If you are sleeping well or not concerned a bit, you may want to dial up the risk just a bit.  If you’re comfortable with a small bit of anxiety, your allocation is probably just right.

I am happy to discuss any of the reasons that the markets have been down recently, please feel free to email or call.

Have a great weekend