I included one simple paragraph at the end of last month’s market update. “By month’s end, a modest bout of volatility re-entered the landscape, as investors took note of an upward creep in Treasury bond yields. It’s a reminder that stocks don’t rise in a straight line.”
While tranquil periods won’t last forever, one should never try to time a peak or trough in the market. Corrections can come suddenly, surprising even the most astute market observers.
There is no one out there (past or present) who can consistently call the tops and bottoms in the market, period.
A sudden downdraft in shares can be unsettling for some. It's very understandable. I’ve heard a stock market correction described as similar to being blindfolded on a roller-coaster. You know there’s a bottom, you just can’t see it.
February’s early slide saw the S&P 500 Index lose just over 10% in value–an official correction–in just nine trading days. That’s right–nine trading days from an all-time high to a 10% decline which, according to LPL Research, was the quickest on record.
Let’s review the landscape. Moderate economic growth at home and abroad has been fueling corporate profits; analysts have been sharply revising 2018 profit estimates higher (Thomson Reuters); inflation has been low, and interest rates, while creeping upward, remain near historically low levels.
It created an ideal environment for global stocks, i.e., low volatility and upward momentum.
However, when the market is priced for perfection, or something near perfection, any disappointments are likely to be amplified.
What sparked the market sell-off? Yields on the 10-year Treasury were rising, which began to create a stiffer headwind for stocks.
But what likely would just have been a mild downturn snowballed. As we entered February, speculators who had piled into Wall Street products designed to take advantage of low volatility were suddenly forced to jump ship, which exacerbated the selling pressure in stocks.
Further, computer program trading kicked in, adding to the turbulence.
Let me take a moment to repeat a familiar refrain. Making investment decisions during times of emotional duress is rarely profitable.
Walt Bettinger, CEO of Charles Schwab, summed it up well in a timely interview at the end of last year that was published in Fortune and picked up by Money.
“We don’t believe it’s possible for people at scale to beat the market and predict the market and know when to get in and out of the market,” Bettinger said. “Where most individual investors get in trouble is when the market goes down, and they can’t stand the pain, so they leave. Then they either don’t get back in or they wait until the market’s turned and gone way up and then get back in. That’s what really crushes individual investors.”
We’ve experienced periods that might be described as modestly “painful” since 2010. Admittedly, the 2001 and 2008 bear markets were difficult, but even investors that were fully invested in stocks–something I rarely recommend–were made whole and then some if they didn’t sell out at or near the bottom.
The early February downturn can be pinned on technical factors and not economic distress, in my view. The profit and economic outlook is upbeat, which I believe cushioned the downturn.
Interest rates, however, may tick higher. It’s something that could create headwinds in the nearer term, even as profit growth this year is forecast to accelerate (Thomson Reuters).
Table 1: Key Index Returns
|MTD %||YTD %||3-year* %|
|Dow Jones Industrial Average||-4.3||1.3||11.3|
|S&P 500 Index||-3.9||1.5||8.8|
|Russell 2000 Index||-4.0||-1.5||7.0|
|MSCI World ex-USA**||-4.9||-0.6||2.6|
|MSCI Emerging Markets**||-4.7||3.2||6.5|
|Bloomberg Barclays US |
Aggregate Bond Index
Source: Wall Street Journal, MSCI.com, MarketWatch, Morningstar
MTD returns: Jan 31, 2018-Feb 28, 2018
YTD returns: Dec 29, 2017-Feb 28, 2018
**in US dollars
We hope you've found this monthly update to be very helpful and educational. If you have any questions and would like to discuss your portfolio or other important financial matters, please give us a call at (330) 836-7000 or schedule an appointment with us here.
Many happy returns on life,
Jonathan Torrens CFP®
President and Chief Investment Officer
TCM Wealth Advisors