Stocks have to go down

Stocks have to go down…

This is why they’re called risk assets. When the possibility of loss goes away, so too does the probability of gains.

These are the times that successful long-term investors separate themselves from the pack. Most investors wrongly assume that you make all of your money during bull markets. The reason so many investors fail to reap the ultimate return of stocks over time is because they make poor decisions when markets fall.

Strange as it may seem, fear is essential to the investing process. It’s got to be there in order for you to have any future upside potential in the shares and stock funds you own. Stock investors are rewarded for facing these market fears because so many others won’t.

We all know how the dot.com craziness ended as we have the benefit of hindsight. After the over-valuations of the time, motivated by the general lack of fear of losses during that period, it took many years for us to see meaningful upward movement in share prices.

What about this past week?

As a baseline, it’s important to remember that market volatility is normal and big drops aren’t unusual during bull markets. For perspective in this regard, the S&P folk say that just over 50% of all annual periods for the S&P 500 since 1950 saw a 10% correction or worse. Since 1950, there were only four years – 1954, 1958, 1964 and 1995 – when stocks didn’t have a least a 5% correction at some point during the year.

Most recently, in both 2014 and 2015, the S&P 500 finished January down around 3.5%. However, the two-year annualized return was in the neighborhood of 6% for these years, so a bad start didn’t turn out to mean anything particularly terrible.

I think the editorial staff at Fisher Investments Market Minder blog did a first-rate job of condensing the week. Here’s what they said on the 7th of this month:

“Headlines are already proclaiming the first four days of this year, “the worst start to any year, ever.” “So goes January, goes the year,” the old saying goes. The thing with this saying is, it’s wrong. Since 1926, including dividends, 34 Januarys have been down. In 18 of those, the year finished up, including January’s drop. Just last year, the S&P 500 finished January down -3.0% including dividends. While the year wasn’t stellar, the S&P did rise 1.4% including dividends, meaning selling at January’s close would have cost you over 4%, not counting trading costs and taxes. The New York Times rightly critiqued the theory today as being a case of interesting correlation without causation. But the thing is, it doesn’t even correlate. This is a seasonal myth you shouldn’t get caught up in.” (Italics mine.)

Speaking of things to not get caught up in

This week’s market moves has again brought those who have been predicting a recession out of their caves. Like the proverbial stopped clock, they’ll be right again – eventually. But, in my opinion, definitely not now.

Here’s some facts to help you deal with the unusually high levels of ignorance currently passing as conventional “wisdom” about this.

Major causes of a recession include combinations of high interest rates, high inflation, increasing rate of unemployment, declining housing prices and declining rates of Gross Domestic Product (GDP) growth for two successive quarters.

As to how many actually of these are present now, as I analyze the data, the correct answer is that none of these apply. The doom crowd must have missed the all-time record car sales in 2015 and last Friday’s way strong jobs report. Maybe these people forecasting a US recession have their charts upside down???

Perspective

It’s said that our markets take the escalator up and the elevator down, as they usually go down more quickly than they go up. I understand how markets moving as they have can, shall we say, make you pretty uncomfortable as you look at a bunch of red on your screen or see lesser values on your statements. There is absolutely no way with whatever series of indicators or studies to predict why investors decide it’s time to panic. So, what do you do when everyone seems to want to head for the exits?

First, as I hope some of the things mentioned here have told you, this is regular market behavior. The reasons for this round of selling aren’t exactly the same as in the past two Januarys – looking back only gives us what can or did happen so we can make some informed decisions today. Holding on to your quality positions always feels great in up markets – and is easy to do, too.

Your long-term success means not abandoning these simply due to price changes. The percentage by which the overall market has dropped to date represents a discount that likely wouldn’t even get your attention at your favorite retailer.

Next, there’s all this geopolitical stuff – the Saudis and Iran; that goofy guy in Pyongyang, ad nauseum. The Chinese economy has been “collapsing” for at least 5 years now. We’ve had issues similar to these forever. Not to make light of them but the record shows that wars, natural disasters and the like have very rarely had a significant long-term impact on the markets.

Weeks like this most recent one are ones where your best course of action is likely no action at all. Like the weather, markets change daily and so too can sentiments. Don’t get all caught up in the current drama. Stay with your strategy.

So there’s no confusion about the title of this piece, I’m still quite bullish. I’ve seen nothing to change my view.

Cheers!

Mike

Securities and Investment Advisory Services offered through KMS Financial Services, Inc.

The above information is educational only and is not intended as a recommendation to buy or sell any security.

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Past performance is not indicative of future returns.

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