Like the NPR Politics Podcast always begins, I should report that I am writing this blog the morning of Monday, October 15th. Things in the market, economy and global political scene may very well change between now and when you read this. With the speed of change and information today, maybe every blog post, article & podcast should be timestamped this way.
Last week was a rocky one in markets. On Wednesday, October 10th, the Dow Jones Industrial Average dropped nearly 832 points, or 3.1%. Other major U.S. indices followed suit, with the S&P 500 falling 3.3% and the tech-heavy Nasdaq dropping 4.1%.
On Thursday, conditions worsened. The Dow dropped another 546 points, or 5.2% over the two days. The S&P 500 and Nasdaq gave back an additional 2.1% and 1.3%, respectively.
Bond yields rose. The 10-year U.S. Treasury note rose to 3.211% building on already big gains in September.
The media loves a good crisis. I could fill pages with links to news clips and sound bites around these market events. National news, local news, websites, radio shows, all covered the events, with talking heads lining up to discuss trade wars, bond yields, the Fed Chairman’s job security and much more.
When did they find time to discuss all this? CNBC went as far as running a full six-hour “Markets in Turmoil” special from 6 a.m. to noon Thursday morning. If six hours of experts waxing and waning about what this means and what to do about it wasn’t sufficient, they followed up with another special of the same name at 7pm that evening.
Look, I get it. All these outlets have businesses to run. When events like these occurs in markets, viewership and ad revenue increase. It’s really no different than the overblown coverage we see when an inch or two of snow comes to town.
Unlike the weather, these issues revolve around personal finances and can drive more dangerous behavior than an extra trip to the store for milk and bread. Regardless of how exaggerated the reaction, the fear and panic induced can be very real. As an example, the most disappointing sound bite that found my ears was a context-free comparison of how much worse the point drop in the Dow was on Wednesday compared to October 1987’s Black Monday.
It’s first important to note how dissimilar this is to Black Monday. Yes, the point drop the Dow experienced on Wednesday was more than 300 points greater. In fact, Wednesday’s drop was the third worst one-day point drop since 1915. Adjusting things proportionately, the Dow would have to fall nearly 6,000 points to equal the 22.6% drop experienced on that infamous day.
While last week’s events can be spun to seem historic in nature, to recall a similar market drop we may not have to look back as far as you think.
As in February. Of this year. When, on February 8, the Dow dropped 1,032.89 points.
Yet even after last week’s decline, these indices are still just a few percentage points off all-time highs reached just weeks ago.
A few more facts…
- While the market has seemingly been on a non-stop upward ride since the 2008/2009 crash bottomed out in March 2009, there have been 23 corrections of 5% or more since then.
- A drop of 2% or so in a given day in the market occurs, on average, about five times per year.
- According to Fidelity Investments, on average over the last 38 years, “the largest drop in price from peak to trough for the S&P 500 index in any given year has been 13%. In other words, intra-year declines of 10% are quite normal.”
Why Did This Happen & What Will Happen Next?
A client shared this tweet from Nobel laureate and New York Time columnist Paul Krugman, that may sum up the answer to this question best.
That said, we can touch briefly on at least a few of the concerns that contributed to the recent spike in volatility.
- Some investors are worried that climbing bond yields will lead to lower stock prices.
- Some, including the President, blame the Federal Reserve for raising interest rates too quickly.
- Others are concerned that the impact of trade tariffs and disputes to American companies and consumers are just starting to be felt and that announcements like this from Ford are just the beginning as we realize that the playbook for trade wars is out of date in a world economy that is so globally intertwined.
- Others believe that companies freezing their stock buyback programs ahead of earnings season is enough to spur turmoil.
The bottom line is we don’t know what lies ahead. Even if we did, we wouldn’t know precisely how markets would react to that news to benefit.
All we can be in control of is how we behave in the face of short term volatility knowing that we tend to feel the fear of downturns more than we do the joy of positive returns. The S&P 500 has returned more than 362% (including reinvested dividends) since March 2009, but that doesn’t feel the same as a sharp one or two-day pullback.
To avoid completely sounding like a broken record, I’ll simply refer you back to Jeannette’s blog from a few weeks after the February market drop for guidance on how portfolios can be built for resilience regardless of temporary market conditions.
If we do sound a bit repetitive, it’s simply because the fundamentals of investing rarely, if ever, shift. Short-term ups and downs are a certainty in markets, but it doesn’t mean they all deserve reaction.