Broad markets have declined approximately 15% since December 2015. More volatile asset classes like small company stocks and emerging market stocks are down about 20%. The “experts” speculate that worries are centered on commodity prices, in particular oil. Along with slowing growth in China and Europe, markets seem to fear a global recession.
We know stock markets are forward looking. Today’s prices reflect expectations of financial and economic conditions months or even years in the future. Prices today not only incorporate all known information, but also unknown information including forecasts of future economic conditions, earnings, growth, interest rates, etc. This process of incorporating future expectations amplifies volatility.
Fortunately, we can measure historical volatility and put today’s situation in context. On average, we know that broad market declines greater than 10% but less than 20% have happened about every two years since 1950. The current decline of 15% is the fourth in this range in the eight years since the recession of 2008-2009. Therefore, this decline is, so far, consistent with historical norms.
Declines of greater than 20% but less than 30% usually happen around every 3.5 years since 1928. Should the current market decline further and fall by more than 20%, it would be the second such drop since 2008-2009. While a further decline may or may not happen, it would also be within historical norms. Declines greater than 30% occur only once every 10 years or so.
The problem is what we always seem to hear from the media is that this time things are different. Of course this time is different! At any point in history, the situation is new and conditions are unknown compared with the past. Markets price risk, react to uncertainty, and continue to grow despite wars, recessions, political revolutions, and economic transformations. It’s never a straight line. WWII, the OPEC Crisis, and 9/11 were all events that were new to the world, but despite these and many more unforeseen circumstances the markets continued to grow over the long term.
Market volatility is normal. If we look beyond this recent volatility, we can be well positioned to capture the long-term returns that markets make available. To do this we have to remain fully and properly invested at all times.
For every seller that liquidates a position out of fear or expectation of decline, there is a buyer somewhere who finds the lower price to be an opportunity. If there were only sellers and no buyers, the price of a stock would go to zero. While downward markets test our mettle, they can be an excellent time to rebalance and take advantage of lower prices in stocks.
We will continue to monitor the situation.
Thank you for your continued trust and confidence.
All investments involve risk, including the loss of principal and cannot be guaranteed against loss by a bank, custodian, or any other financial institution.