In a strikingly similar fashion to the decline that occurred in February of this year, the past week in the market has served as a swift and unexpected reminder that markets don’t just go up, they can also go down. Worse, sometimes the declines can be swift and painful as they have been over the past couple of days. As of Thursday, the S&P 500 has declined 6.9% from its all-time high, which was reached a few weeks ago, and markets around the globe have followed with similar declines.
Although surprising, this type of volatility is not unusual. The most recent and similar downdrafts occurred in February of this year, and before that in 2015 and 2016. But declines and volatility are very normal for the stock market. In fact, since 1980, the S&P 500 has experienced an average intra-year decline of almost 14%, but has still been positive 76% of the time. (Click the following link to see this chart from JP Morgan – JPM Annual Returns and Volatility)
We believe this decline, like the decline earlier in the year, has been caused mostly by technical trading issues and will likely to be short lived. There is no clear catalyst to explain the drop other than the market was probably overdue for some type of decline, and after the recent gains, there may be some short-term profit taking occurring. There isn’t a clear fundamental reason for the decline, as the economy remains strong. In the wake of this decline, we expect higher volatility in the coming weeks, and to a lesser extent for the remainder of the year. It will likely take a while for things to settle back down, but we don’t view this as the beginning of a serious or permanent decline.
In the short‐term, it is nearly impossible to anticipate the twists and turns in the stock market. But in the long‐term, history shows that investors who have a plan and can remain calm during the short‐term ebbs and flows are rewarded with beneficial long‐term investment returns. Thank you very much for your continued confidence in our service and advice. If you would like to discuss our opinions, outlook, or your portfolio in greater detail, we would be happy to schedule a meeting or a conference call at your convenience.