What just happened to markets?

Headline stories about the stock market pullback this week were largely focussed on the drop in the Dow Jones Industrial Average (less so on other indexes, but they were not immune). The year-to-date total return marked by the DJIA on January 26 was +7.77%. By the close on Friday, the DJIA had settled to +3.34% YTD, a drop of around 4%.

This is a relatively large drop given the low volatility and upward trending we’ve seen in markets in the last couple of years. By historical standards this is a mere blip, and 3.34% YTD total return still represents, annualized, over 35% growth!

I was in my car last night and caught a story on the news radio about the stock market pullback. The commentator didn’t really have a very clear rationale for drop – something about markets and the broad economy not being correlated….. The broad US economy is doing well, creating jobs and growing, but markets took a big pause.  Hmmm. I didn’t find that very satisfying.

A few minutes earlier I had read in WaPo the main reason that markets pulled back, and especially on Friday, was to do with the 10 year benchmark interest rate surpassing 2.8%, on its way perhaps to 3%. The case was made that a 3% benchmark rate will send a signal to some investors that bonds might be more attractive than stocks on a risk-adjusted basis.

I read another article this morning in the NY Times that makes a similar point and goes on to say there may actually be a connection between the pullback and the broad economy: expectations are that the broad US economy is going to grow at, say, 1.5% not the 3% promised by Donald Trump.

So maybe there is a decent connection between stock market indexes and the broader economy after all. Given how expectations affect spending and investment decisions so heavily – both in markets and in the economy at large – this really shouldn’t be a surprise. And the 10-year interest rate moves in large part due to expectations about inflation rates and the cost of money in the future. Inflation expectations may be climbing.

This tells me, perhaps, that expectations could well be shifting to lower future growth rates in the economy and to lower investment returns from markets. Nothing says these expectations will be proven correct, but it is worth noting.

It is also worth reminding that last year’s market performance is no guarantee of future performance. But even at a 3.34% total return YTD, the DOW isn’t exactly off to a bad start.

Author: Michael

staff@money4retirement.ca

4 thoughts on “What just happened to markets?”

  1. Hi,

    I think the lack of volatility in the market in the last couple of years have made most people hyper sensitive to any big moves in the broad indexes. Everyone is trying to connect some thing to something else to make sense of this story. In the end markets move quickly like a herd of wilderbeasts fueled on sentiment, often without causation. The reality is that markets eventually get ahead of themselves and then correct. Its normal, it has happened throughout market history and will continue to do so forever. You should expect one every year or two. Ten percent, 20 percent! It happens all the time, just look it up, its not the end of the world as analysts try to make you believe.

    Corrections come and go quickly, with no lasting damage in a bull market. Its just sentiment. What people should be afraid of is a bear market, these last 18 months by average and can see 20-40 percent drops during that period. These are often caused by recessions or other fundamental scary things. They generally move slower, not like the sentiment moves we have just seen. They are very different.

    Even a bear is not the end of the world. Its just part of the natural investing cycle that keeps turning. If you have an investing horizon of twenty years or more, its not a big deal. From my perspective, its an opportunity to accelerate your investments and take advantage of everyones fear. Or said another way, buy low and sell high.

    Your comment on erasing a month or so of returns really puts things into perspective, its just a few percent after all. Even if markets continue to fall all the way to 20 percent or more, its normal. Sorry no story here…. but all the analyst will be screaming that the end is near and scaring everyone out of their minds and equity positions.

    I always go out of my way to add to my portfolio when there is a big move down, its in my best interest. The reality is that the stock I buy will likey come from someone who was scared out of their position. Later when things look rosy again, i will sell it back at a higher price.

    I guess my comment is dont sweat the short term, its all normal….its ok, happens all the time. Volatilty is good, it drives the market up, and sometimes down. Nothing to be afraid of here. Bull market returns average 20% or so per year, so unless the bull has ended (unlikely yet) you can expect the really good times to continue. If i am wrong and the bear is here, well that is ok too…normal.

    Raven

    1. Hi Raven,

      I agree fully with everything you’ve said. It irks me that the headlines say: “Dow loses most points in one day in history!!!” Dig a little deeper and you’re sure to find out that actually, the Dow’s recent drop in percentage terms, was about the 25th largest in history. Not so jarring.

      I think your point about low volatility in the last year or more is a good one. People seem to hate this bull but I have to admit a slow and steady increase in portfolio value is not a bad thing.

      In my particular case I am happy with my portfolio allocation, the specific holdings I have, and just plan on trudging along. In March, when I next trade, I will see where things are and if I need to re-balance to keep my asset allocations in line with my objectives. If I’m lucky, I’ll get to do some bargain shopping too!

      Happy hunting for deals.

      MP

      1. Michael,

        Your biggest weapon against market volatility is discipline…. which you have. Its when people get afraid or emotional about their situation they start making bad decisions. The media seem to play against investors, always trying to sensationalize little things into big things. Most often the best strategy is to do nothing, but admitidly its counter intuitive. Like you, i will wait, and rebalance, you can not go wrong with this approach.

        Thanks,

        Raven

        1. Yes, in a nutshell, we seem to be saying the same thing: have a decent time horizon, a strategic perspective, a well-thought out plan and the discipline to stick to it. Don’t let emotions (greed or fear) sway the logic. If the inherent logic is challenged, adapt.

Leave a Reply