Groundhog Sees ... A Bumpy Road?
Coming off of 2017 when many equity investors saw account balances surge, January looked like more of the same returning 5.7 percent, according to Standard & Poor’s 500 Index of large-cap U.S. companies. Unfortunately, once the calendar turned to February and Punxsutawney Phil saw his shadow, the market became more volatile than we’d experienced for quite some time. In fact, in the past 24 months, we’d only seen one pullback amounting to 3 percent.*
When the S&P 500 fell 2.1 percent on Groundhog Day and then 4.1 percent the following Monday,* some investors no doubt committed a common mistake of letting emotions govern their investment strategy or decision-making. Jumping out of the market (market timing) at the slightest hint of bad news can be a costly move. Downswings in the market generally coincide with large upswings. Between 1990 and 2017, an investor who stayed invested and missed no days in the market saw a 9.7 percent total return. On the contrary, an investor who jumped out of the market during that period would have most likely missed the 30 best days, and would have gained only 3.2 percent total return.**
Corrections or pullbacks in the market are common and frequent. The majority of declines fall within the 5-10 percent range with an average recovery time of approximately one month. Declines between 10 and 20 percent occur about every three years, with an average recovery period of approximately four months. In looking at 13 corrections that amounted to 5 percent or more from 2009 through 2017, the average time to recover to new S&P 500 highs was 55 days.**
Pullbacks and market volatility occur frequently during the normal market cycle. In looking at the current market cycle, Morgan Stanley’s Global Investment Committee believes that U.S. and non-U.S. earnings are likely to increase further into 2018, but that financial conditions will tighten this year. Increases in interest rates appear imminent, and some level of inflation seems likely. While economic fundamentals remain solid, we shouldn’t expect an encore of 2017. With that outlook, we should expect a bumpier ride with more volatility.
While the volatility may be unnerving, investors are wise to consult with their financial adviser to stay diversied and not make emotional decisions by trading on negative news alone. I was quite disappointed in some local newscasters who seemed to sensationalize the February pullbacks by stating the decline was the largest point decline ever. While statistically true at one point during the trading day, the sheer volume of the market today is far greater than at any time in history. In terms of percentage pullback, a 4.1 percent decline is more modest and less alarming taken in context.
It’s important to remember markets tend to trade on future expectations over the long term. Volatility is normal and should be expected. While groundhogs may provide an annual forecast on how many weeks of winter remain, we humans need to follow a sound investment strategy with a much longer-term perspective.
* Bloomberg; S&P Dow Jones Indices LLC, S&P 500
** FactSet, Morgan Stanley Wealth Management GIC.
John R. Gilliland is a Financial Advisor with the Global Wealth Management Division of Morgan Stanley in Des Moines, Iowa. The information contained in this article is not a solicitation to purchase or sell investments. Any information presented is general in nature and not intended to provide individually tailored investment advice. The strategies and/or investments referenced may not be suitable for all investors as the appropriateness of a particular investment or strategy will depend on an investor's individual circumstances and objectives. Investing involves risks, and there is always the potential of losing money when you invest. The views expressed herein are those of the author and may not necessarily reflect the views of Morgan Stanley Smith Barney LLC, Member SIPC, or its affiliates.
S&P 500 Index is an unmanaged, market value-weighted index of 500 stocks generally representative of the broad stock market. An investment cannot be made directly in a market index.
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