Mark Twain once said, “history doesn’t repeat itself, but it often rhymes.” The same can be said about some of the stock market activity in recent years. We believe there are striking similarities between last month’s market correction (a correction is a loss of 10% or greater) and two other fairly recent correction episodes that occurred in 2015 and 2016. You can see the three recent corrections traced in the chart that follows:
In all three cases, the market appeared to be functioning in calm manner before falling suddenly and at an alarming rate. In each instance, the initial downward slide was the quite severe and served to upset investor expectations. There was then a steep rebound, and then a second slide before finally stabilizing and settling into a far less volatile pattern. For the first two examples, it took about 2-3 months before the market return to a normal state.
In this new age of high speed trading driven by computer algorithms and technical triggers, large trade orders can be executed in milliseconds. In the most recent corrections, these computer driven trades appear to compound upon each other, creating something of a downward vortex in stock prices. In these cases, leveraged portfolios, leading to margin selling, can also add to and prolong the selling pressure. The suddenness of these selloffs appears to be something of a “new normal” and will likely repeat from time to time. ‘Thankfully, as jarring as they’ve seemed, these corrections have also been relatively brief and fairly shallow.
So what is an investor to do? In our opinion, reacting to events like these is likely to be a mistake. These temporary market flare-ups have no bearing on the long-term success of a financial plan, which is crafted to benefit from long-term market growth. Brief bouts of volatility can feel painful in the near-term, but are soon forgotten. Our advice (as always) is to stick with your plan. If you don’t have one, you should get one.
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. Contact us by emailing firstname.lastname@example.org.
Horizon Advisors is a Houston based fee-only wealth management firm. Horizon is a fiduciary advisor. We specialize in helping successful individuals and families understand, organize, and manage their often complex financial situations. Horizon offers integrated financial planning and investment management services.