After an incredibly muted 2017, volatility has returned to the markets. This year, the US equity market (using the S&P 500 as a proxy) has experienced two separate “corrections”. A correction is defined as a temporary decline of 10% or more. The market got off to a great start in January and hit all-time highs in September, but has given most of that back over the past few weeks. With dividends, the S&P 500 is up slightly for the year.
In times of uncertainty, historical perspective can be a wonderful ally. To that point, corrections are a normal part of the investing experience. Since 1980, they’ve occurred almost every year, with the average intra-year drawdown being about 14.4%. And yet over that time the market ended higher three out of four years on average and has compounded at nearly 11%.
That brings up a fundamental truth of investing: If markets didn’t go through periods of gyration, there wouldn’t be any risk in owning them. And without risk, there wouldn’t be commensurate return. Risk and reward are inseparable. The sooner an investor accepts this reality, the better off they will be.
Finally, corrections like this can be healthy, acting as a release valve for excess optimism. Expectations have been high for a while, especially for the tech sector, which is selling off more than most. Investor enthusiasm for big tech names grew to unreasonable levels, making a tech correction inevitable. On a positive note, future earnings are now cheaper than they’ve been in many years.
How long will this decline last? We don’t know. While corrections tend to be relatively short-term phenomena, we wouldn’t be surprised to see the recent lows tested a few times before this is all over. Each correction is different. They’re never neat and orderly and they don’t follow a calendar. But all corrections throughout history have had one thing in common: they’ve all been temporary.
What should I do in response? Very little. The portfolios we have built for you are designed to be durable over the long-term. They will have ups and downs in the near-term, but patience is what allows you to capture the full return of all the individual components over time. We regularly review client allocations in light of market risks and opportunities, and if a change is warranted, you will hear from us.
Remember that this too shall pass, and when it does, our ability to endure the ambiguities of the markets will be that much better.
We will provide you with a comprehensive market memo at year-end. Until then, have a wonderful holiday season! If you have questions, comments or concerns, please let us hear from you.
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