Fred Sanford from the 70’s sitcom Sanford and Sons used to grab his heart once a week and tell Lamont that “this was the big one”. It never was. Our indicators tell us the current market drop of 9-10% is not the ‘big one’.
Evidence shows us that conditions are not at high risk of entering a bear market. As the chart below attests, most downward moves similar to the one we have seen recently are short lived “pullbacks” or “corrections.” However, with the Federal Reserve raising short term interest rates, the ten-year Treasury bond yield rising, bigger projected deficits, and a historically expensive stock market, increased volatility is to be expected during 2018.
The pullback over the last few weeks was bound to occur. However, nobody precisely predicted its arrival, and no one knows exactly when the pullback will end. History shows us that declines of this type typically bring markets down anywhere from 5% to 15%. History also shows that corrections typically last just a few months. Away from stocks, other indicators like the corporate bond market remain very calm. Economic numbers are very strong. Company earnings are robust, and do not look to weaken next quarter. The beneficial effects of the new tax cut are yet to be recognized this year. All in all, signs point toward this market decline being a correction, and NOT the first stage of a bear market (>20% decline).
A review of what starts bear markets:
- Bear markets typically are caused by certain catalysts: conditions such as a stressed labor market, or declining company earnings. A review of the indicators that have caused bear markets in the past leads us to believe that presently, we are not headed for a bear market.
- Bear market conditions can also develop at the end of a positive credit cycle like the one that began in 2010 and which continues today. Typically, this should not occur until widespread refinancings are needed to address the maturing debt from earlier in the decade. This is not on the near-term horizon.
- Recessions, and the bear markets they produce, are telegraphed by the inversion of the Treasury yield curve. This phenomenon is sometimes due to policy error by the Federal Reserve. Current thinking indicates that short term yields may be raised by the Fed three times in 2018, which may cause the yield curve to flatten or even become inverted. This factor requires monitoring.
Stay The Course
Do not sell or buy based on emotion. If you do not need to use your investment assets in the next year, then do not succumb to the fear that grips the market during sharp declines. Maintain your current asset allocation, and remember that every single stock market pullback, correction, or bear market, has been followed by a full recovery in due time.
If you have cash reserves available to invest, work with your advisor to identify opportunities that fit your risk profile. Astute investors look to buy when stocks go on sale.
If you are not hearing from your advisor during this period of volatility, you might need to reconsider what you’re getting for the fees you are paying. If you want sound, timely advice from experienced financial professionals, call Price Wealth Management and start a conversation.