My, what a week it’s been! The market had its largest single day point drop in history on Monday, seeing a decline of The DOW of 1,175 points, which followed an almost-as-bad Friday. Then yesterday we had another 1,000 point drop. As a result, everybody is running around competing for spots on the news shows to discuss why this occurred and what it may mean for the rest of the year, and for your financial future. And while this is no laughing matter, there is an opportunity for perspective I’d like to offer.
The DOW’s value right now, as I write this, is back to the level it was at the beginning of December when everyone was gushing about how great the market had been doing. That’s right, the market’s largest point declines in history have done little more than reset the investing calendar back two months. That just shows how quickly the market ran up in a very short period of time between December and now.
Of course, this could mark the beginning of a larger continued selloff in the stock market, which may play out more slowly than it has this past week, but the fact of the matter is, we’re still in VERY good shape, thanks to the incredible returns of the last few months. This leads any reasonable person, however, to question, “Should we be doing anything?”
While everyone’s situation is very unique, and will warrant a different perspective on these matters, we’ve already worked with each of you to put into place the planning that still allows objectives to be met whether the market is down or up over the next year or two. That said, here are a few other thoughts to consider.
- The economy is strong. There are no major recessionary indicators right now that point toward economic reasons for a market panic.
- Banks are strong. A study of federal banks reveals that they are by and large flush with cash. Unlike 2008 when banks were leveraged to the hilt, banks today are sitting on large amounts of cash that provides stability in the larger economy.
- Interest rates are rising. One of the Federal Reserve’s primary objectives is to get interest rates back up to ‘normal’ levels. Because interest rates are so closely tied to bond values – and bond values’ attractiveness affects stock prices – we’re witnessing some resetting of asset values relative to risk in the respective markets as a result of getting back to interest rate business as usual. A reasonable rise in interest rates is actually a sign of a return to strength in the economy.
These factors should give investors plenty of reasons to shut off the TV and remain focused on investing for the long-term. These declines present buying opportunities within your portfolio, and we’re implementing those on an ongoing basis, trimming cash and bonds in order to buy quality stocks at a discount.
If, however, you find yourself jolted by these large market movements, please refer back to last week’s commentary on training your mind to process the scale of change in our new markets. The numbers are bigger which requires that we reset our thinking as well. If the market resets back to earlier values, we’ll consider making small strategic adjustments, while remaining focused on the long game.
All the best,
Adam Cufr, RICP®