You know how they say, “if you can’t take the heat, stay out of the kitchen?” That’s the story for the stock market.
Stock markets move up and down, sometimes by a lot. Corrections are scary and we have a lot of fear when we are going through them.
Do you remember the 19% correction in May to October of 2011? That was pretty scary, but most people don’t remember it because by August of 2012, the S&P had returned to close above its previous high.
Perspective Matters
As of January 20, the S&P 500 is off 11% since July 20, 2015. The average market correction since December 1949 is -14% with the average correction lasting 120 days.
The average gain following a market correction is 47% (median gain is 32%) lasting an average of 495 days.
We are not promising that the current market drop will be less painful than the average market correction, or that there will be a large gain following this recent volatility.
Recession Unlikely
We don’t know what the future will hold, but most analysts think that this is a temporary reaction to slowing growth in China, fears over slower earnings in the US and an overreaction to a drop in oil price.
By the way, since when was a drop in the price of oil a bad thing?
We don’t expect to see the US fall into recession this year, which is what typically causes the worst of the bear markets.
Rebalance Opportunity
In the same way that we won’t recommend that you sell your car and buy a bike when you are stuck in traffic, we won’t recommend that you sell stocks now.
Our advice is that you stay in the car, continue with your investment program and turn off the TV.
We expect market sentiment to move stocks up and down and will use this volatility to rebalance to our target allocations. You’ll be happy with this automatic reset should prices recover.
On the other hand, if you can’t stomach this kind of volatility and you stay awake at night worrying about the value of your investments, then maybe a more conservative strategy is right for you.
Photo credit: Diana Robinson via Flickr Creative Commons
