This Sucks…I Know

By David B. Armstrong, CFA | Oct 29, 2018 | Weekly Market Commentary

THESE.

THINGS.

HAPPEN.

Here are some cold hard facts:

1. So far, the S&P 500 is down 8.8% for the month of October (as of Sunday, October 28, 2018). If it finishes here, it will be the worst month since February of 2009 and the worst October since 2008.  Remember those months?
2. Did you know that during the third quarter (the one that just ended), there was no daily move in the S&P 500 of more than 1%? The last time that happened was 1963.  I was not even born yet. However, this month we have seen six days of +/-1%…that’s about 33% of the trading days this month.
3. The S&P 500 has lost ground on 14 days out of the 18 trading days so far this month. That’s more than any month since May 2012.

We have been here before…remember 2016?  No?  Well thankfully I wrote a blog called “2016 – Here’s What Happened.” Please pay particular attention to the paragraph titled, “First, the Recession Fear.”  2016 started out with the nastiest first two weeks of a year ever.

The S&P 500 sold off 10% through February 11^th, 2016.  It was at 1,829.

Today it’s at 2,641…after this horrible October.

The chart below from J.P. Morgan shows you that, twice a year, the market reminds us that these things happen…twice a year.  Going back to 1980, the average drop during a calendar year is 13.8%. Each red dot shows you the maximum loss from the peak of that calendar year.  The dark bars show the actual return for that year…see how 29 of the 38 years ended positive? (The data is as of the end of the 3^rd quarter.)

I’m not saying readers and clients don’t have a reason to be upset.  No one likes losing money. I’m just saying there is no good reason to panic about this.  The statistics show the smart thing to do is leave your portfolio alone.

What SHOULD you do?  Do this – take stock of how you feel right now.  When the market recovers, because it will, please remember how you felt right this second.  That’s the time to think about action. At that time, figure out if you need cash over the next 12-18 months.  If so, raise it.

Financial plans use statistics and averages.  Of course, they are not perfect, but they are useful for creating a base case and adjusting as things change. The problem is that averages are made up of a distribution of individual calendar year returns over time.  It’s living through the severe individual calendar years of returns that cause investors so much pain.

The key is to let the individual calendar years, whatever they may be, collect up into the average.  That takes patience and discipline.

And that’s hard.

There is no return without risk.

This sucks, we get it. We ask you to focus on the long-term, while we all wake up every day living the short-term.  Please call us if you have any immediate concerns about your individual situation – we are here to listen, and if necessary we will adjust anyone’s investment strategy if his or her individual situation has changed over the past three weeks.

I’ll leave everyone with this – over 2008-2009, the worst financial time to hit an investor since the Great Depression, the Dow fell over 50%.  It recovered by April of 2011…total time to recover was two years.  Those who had a plan and forecasted out their cash needs for 18 months probably did okay.

Keep looking forward,

Dave

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