November 20, 2018 Market Commentary: History Rhymes
Written November 20, 2018
The market has been a little choppy the past six weeks, to say the least! Year-to-date, the Barclays Aggregate Bond Index is down 2.23%, the broad stock market is down 3.19% (NYSE) to up 5% (Nasdaq) and everything in between depending on what index you want to look at.
That’s not great (because who wants to see negative numbers?), but if you listened to the news, you’d think everything was down double digits.
Here’s a 1-year graph of the S&P 500 to give you some perspective. That blue line is called ”support.” This is the level that the S&P held back in February and the beginning of April. If the market continues to fall from here, it makes it a good contender for where the index might ultimately go before being able to meaningfully rally.
If that’s the case, it would be a 12% decline for the S&P 500 and a 16% decline for the NASDAQ, and that’s fine. Those kind of declines are normal corrections in the midst of a bull market, - and guess what? Three years ago we were in this kind of situation before! Let me show you.
Here’s a graph of the S&P 500 from May 2015 through September 2016:
This because this is the type of volatility we’re experiencing right now. Lots of choppy ups and downs with not a lot of progress. Crazy drops. In August 2015, the S&P fell 10% in just three days! Do you know what else happened? Big tech stocks fell hard, anywhere from 20-40%. At the time, economists were convinced it was the beginning of the next recession, no hope in sight, get out while you still can, etc. (Sound familiar?)
But with the power of hindsight, we know what happened next. Here’s a graph of September 2016 through December 2017, the time period directly following that of the graph above:
WOWZA. The least volatile year on record and those tech stocks rebounded to fresh highs around March 2016.
Now I’m not saying that this will happen again. I can’t know for sure what the future holds. But let’s be rational. The fundamentals of the economy are stronger now than they were back in 2016. What’s ”new” are only the circumstances around the decline: tariffs, interest rates, oil prices, the dollar…oh but wait, even a few of those are repeat worries!
For fun, I went back and read some of the commentaries I wrote during that tumultuous time in 2015. If you needed proof that history at least rhymes with itself, I could pretty much use my commentaries from back then word-for-word today and it would totally fit.
Before you read the next part, keep in mind that as of today, November 2018, oil is in a bear market, stocks are down a couple of percentage points, and the Fed is probably going to hike rates by another 0.25% in December.
Here’s some text from my December 11, 2015 commentary. Read how eerily it fits with today’s circumstances.
“As of Friday afternoon when I’m writing this, oil has broken to fresh lows not seen since the depths of the year-that-shall-not-be-named (*cough* 2008 *cough*). As oil fell, the market fell with it. As usual, the media is eating this up showing pictures of Wall Street traders near tears at their desks. I can picture them at CNBC now…’Hey Jimmy, the market’s down 2%. Be a champ and run down to Wall Street for
some fresh panic pictures for me. What do you mean they aren’t really panicking down there? Make it happen!’
Okay, I’m being a bit harsh. But when the average investor sees pictures of people who are supposed to know what they’re doing looking like the guy above, it doesn’t exactly instill a feeling of confidence. No wonder why there’s so much investor irrationality. So let’s strip out some of the irrationalism and insert a dose of reality mixed with a generous helping of context. If you only went off of the news, you’d think the market was down double digits year-to-date. Well, it’s not. As of today, it’s down a little bit, anywhere from 2-5% depending on what index you want to follow.
Why is it down? There are a few reasons we can point to. The volatility we’re experiencing right now (as in: this week leading into next week) is thanks to OPEC and the Federal Reserve… the Fed is expected to raise rates by a HUGE 0.25%. I’m being sarcastic about the HUGE part in case you missed that. It’s hard to be sarcastic in writing. Anyway, the thought is that they’ll raise rates this month, be very conservative in their language about the hike, and then not raise rates for a few more months. But investors have built this event up to such sensational levels that the volatility is likely to be very strong (not to mention unwarranted and irrational). This isn't the kind of volatility you want to base meaningful investment decisions, expectations, or predictions on.
So that Santa rally that usually comes in December? It might be quelled. But I do expect that after the uncertainty of a Fed hike is out of the way, the market doesn’t really have anything to throw a tantrum about until 2016. But I’m sure it’ll find something.”
Here’s the end of that same commentary and our message is still the same today:
“The market’s down. That’s okay. It’s not enough to jeopardize your entire financial plan; it’s an opportunity to rebalance, check your surroundings, and see that you’re still on track. While no one likes to see negative numbers, negative market years happen. There’s no getting around it; it’s the nature of the system. We haven’t had a negative year in a long time, which makes it seem unnatural, but going so long without one was actually the stranger case. Here’s what’s important to remember: because we know negative market years happen, even in the best case scenarios, we factor them into your financial plan. That’s why you (and I) have a plan. To get from point A to point B knowing that there are valleys and mountains in between, but there are viable paths to navigate through them all to reach your final destination, whatever you decide that to be.”1
This long commentary is to point out that what we’re experiencing right now in the markets is normal and you’ve seen this movie before! The best course of action is to remain calm and objective about your portfolio and your goals. Just like I said three years ago, we know negative market years are going to happen, and it’s why we have a plan in place.
If you have any questions, if you’re nervous at all, or if you simply want to say hello, don’t hesitate to email or call your advisor. We’re here for you! Have an amazing Thanksgiving!
The views depicted in this material are for information purposes only and are not necessarily those of Cetera Advisor Networks LLC. They should not be considered specific advice or recommendations for any individual.
All investing involves risk, including the possible loss of principal. There is no assurance that any investment strategy will be successful. Indices are unmanaged and cannot be invested into directly. Past performance is not indicative of future results.
The Barclays Aggregate Bond Index is a broad based flagship benchmark that measures the investment grade, U.S. dollar-denominated, fixed-rate taxable bond market.
The NYSE index is a composite index covering price movements of all new world common stocks listed on the New York Stock Exchange. It is based on the close of the market on December 31, 1965, at a level of 50.00, and is weighted according to the number of shares listed for each issue.
The Nasdaq Composite is an index of the common stocks and similar securities listed on the NASDAQ stock market and is considered a broad indicator of the performance of stocks of technology companies and growth companies.
The S&P 500 is an unmanaged group of securities considered to be representative of the stock market in general.