Week in Review
Equity markets continued to be volatile last week, as the broad U.S. equity market closed 2.5% lower. Declining oil prices weighed on sentiment; as prices broke below $30/barrel in both West Texas Intermediate (WTI) and Brent crude, the global benchmark. The widely followed S&P 500 Index closed at 1880, just under 12% from all-time highs – consistent with the declines seen in August and September 2015. Riskier securities such as small-cap U.S. stocks, emerging markets, and international securities – fell further.
Earnings season began last week, and reports from major U.S. banks gathered most of the attention. J.P. Morgan, Citigroup, and Wells Fargo all beat earnings expectations, yet reported mixed revenue results.
Investment-grade fixed income markets were broadly higher last week and year-to-date. The U.S. Aggregate Bond Index has climbed 1% since the Federal Reserve (Fed) raised short-term interest rates in December (more evidence that staying balanced is the best thing investors can do).
Adjusting Client’s Focus
Nearly every market commentary ever written could include the same facts we are sharing in this Weekly Market Review, and investors would still panic and overreact. As market news and performance becomes increasingly available to all investors, irrationality can spread quickly. As investors, we constantly need to zoom out and look at the big picture. Below are just a few things to keep in mind during the current market turbulence:
• We are within the range of a normal market correction that on average occurs about once per year. On average, peak-to-trough, the S&P 500 has experienced intra-year declines of -14%, in line with the current environment. The stock market doesn’t pay much attention to the calendar; just because this is occurring in January is more or less meaningless.
• A 200-point move in the Dow Jones, which most investors unfortunately tend to consider “the market,” is 1.25% today. That same 200-point move was 2.5% in 2008-2009, and a whopping 5% in the 90s! On average, the market has moved up or down by more than 1.25% at least one day per week – not at all out of the ordinary.
• Typical stock market corrections between 10-20% take just four months on average to recover. Even full-blown bear markets (-20% or more) typically recover in two years. Most, if not all, investors should have time horizons longer than this. If they do have shorter time horizons, their risk tolerance should be quite a bit lower and thus cushion the initial decline.
• Market corrections and volatility create opportunity. Accumulation investors, who are adding money to accounts consistently, benefit from investing at more attractive price levels. Income-focused investors benefit from reinvesting, and all investors can benefit from opportunistic rebalancing.