Just How “Unprecedented” is This Drop? Just How Scared Should I Be?

stock market drop and market correction | Sheaff Brock

Just How “Unprecedented” is This Drop? Just How Scared Should I Be?

“Dow plunges 1,033 points and sinks into correction,” the money.cnn.com headline practically jumped off your computer screen February 8th. Now what? you wonder. Yes, the pundits have been saying for some time now that a correction was overdue, that we investors have been waxing complacent, and that what goes up must eventually come down. Is this the beginning of The End?

Whoa….When it comes to stock market corrections, the word “unprecedented” is simply incorrect when it comes to describing the volatility we are now experiencing. The pattern for the S&P 500 index has been to correct every 18-24 months, with the last correction event occurring 25 months ago! The current sell-off is hardly unprecedented, Sheaff Brock Managing Director Dave Gilreath comments. In fact, it’s pretty run-of-the-mill.

But how can we tell that this is a bad cold, rather than a lethal flu? Severe bear markets have typically been associated with recession, hardly a near-term likelihood given the current economy, marked by high employment, new job creation, and corporate earnings. Non-recession “pullbacks” such as the one we are now experiencing have historically averaged 17%, followed by an average one year gain of 30%!

Examples of past non-recession falls in US shares greater than 10% (Source: Bloomberg, AMP Capital) include:

  • April 1971–November 1971:          14% drop     30% one year gain from the low
  • October 1979–November 1979:  10% drop     29% one year gain from the low
  • July 1998–August 1998:               19% drop     38% one year gain from the low
  • April 2011–October 2011:              19% drop     32% one year gain from the low
  • May 2015–February 2016:            14% drop     27% one year gain from the low

“The economy is strong, but investors are worried about inflation, and the possibility that the Federal Reserve will raise interest rates faster than expected to fight it,” Matt Egan of CNN commented. Those factors notwithstanding, Ryan Vlastelica pointed on marketwatch.com“This week’s heavy volatility—in contrast to the historically quiet markets seen over 2017—is the norm for equities.” The trick, he advises, is to avoid making portfolio decisions based on short-term swings and movements.

As wealth managers, Sheaff Brock has been stating that very thing over the years, emphasizing what we believe to be the very “precedented” truth: The stock market rewards the wise and punishes the fool. Disciplined investors focus on building long-term wealth, ignoring short term “noise.”


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