In light of the freefall in markets around the world earlier this week, I figured I’d take a break from my regular video series, and offer some brief thoughts on what transpired, some perspective, as well as some helpful suggestions going forward.
So, the market has been having a rough few days. When this happens, it’s par for the course that the talking heads on TV and finance influencers on social media will magnify these negative headlines and discuss how the world is coming to an end. There is nothing that these finance personalities like more than a good down market. Afterall, it’s good for their business when people panic.
I don’t panic during these circumstances because, after nearly two decades in the investment business, I have a good idea of how this will play out. Instead of getting excited, I just put out these boring (but accurate) videos and e-mails to my clients, in an attempt to reassure others. Before we get to that, let’s discuss some background on the current situation:
First, Why is the market down?
The disappointing jobs report last week caused investors to question whether the Federal Reserve made a mistake by keeping interest rates unchanged. In order to stimulate the economy, the Fed will need to lower rates. They haven’t done that yet. Investors got nervous that the world’s largest economy is headed toward a recession. The Fed can still lower rates next month, so it’s not like they missed their opportunity.
The market drop has also been exacerbated by the Bank of Japan increasing rates, which has led to the speculation that the “carry trade” will no longer work for traders. That popular trade involves borrowing money in a country with low interest rates (e.g. Japan) and investing that money in a country with higher interest rates (e.g. the US). If you’re wondering why this matters to your life, the answer is it doesn’t. It’s just a good headline.
Now for a bit of Perspective:
One of the reasons I will never be invited to appear on as a guest on any major financial news station, is because when you put things into perspective, they are no longer as scary as they first seem. No scary news = Not exciting. No excitement translates to fewer eyeballs and less ad revenue.
Here’s some perspective, according to Data from the NYU Data Library:
- A 5% market downturn is pretty much a sure thing, since is happens 94% of all years.
- Also, A double-digit drawdown happens around two-thirds (or 64%) of all years since 1928.
With that historical context, the current correction is actually weak. Granted, it could get worse, but that does not put us in uncharted waters. Markets just go down from time to time.
Here’s more perspective:
- From 1928 through 2023, the S&P 500 was up 70 years. That’s 73% of the 96-year time frame. It finished the year up double-digits in 56 of those years, almost 60% of time.
Remember, market volatility is a feature of the market and not an anomaly. If you want to outpace inflation, maintain your buying power, and build your wealth, experiencing this fluctuation is just something we have to deal with.
Now the question that many clients have been asking me: Is there anything I can do now?
You can do nothing and go on with your life. If you want to be proactive, you can “Buy the dip!”, which means adding money to your portfolio given that stocks are now essentially on sale from where they were trading just a week ago. It’s hard for most people to pass up a good sale, unless it involves investing. Given the statistics I just shared, passing up on a sale in the market is puzzling.
An finally, people are wondering How this will this play out?
The markets will eventually rebound, the Federal Reserve will lower rates, the markets will reach new all-time highs again, and things will be hunky-dory until the market stumbles again. The cycle will repeat itself. Those who heed my advice, don’t panic, and add money (if they are able) will do very well. Those who panic will develop an ulcer, sell their holdings, and derail their financial life for no good reason. The choice is yours!