By now, you’ve most likely have read the headlines in the news, full of scary-sounding words like the rout and storm, plunge and crash. Whatever you want to call it, investors have certainly endured a rough time over the last week. The Dow, dominating the media’s coverage as usual, dropped more than 600 points last Friday, February 2, and almost 1,200 points on Monday February 5th. Monday’s single-day decline of 4.6% was the largest since 2011. The other major indexes were shaky as well.
It’s been quite some time since we’ve seen volatility like this. The S&P 500 skyrocketed over 20% in 2017. What was even more amazing last year was how calm and consistent the climb was. Since the election, any declines have been mere blips on the radar screen. For investors who have grown accustomed to nothing but clear skies and calm seas, all these headlines might seem rather alarming.
Last week was only the first this year with negative returns, and while markets fluctuated greatly, the swings in percentage terms were not historical. Markets had been gaining steadily without much volatility for over a year. However, volatility showed up last and this week. Talks of corrections, inflation and interest rate hikes create uncertainty in the market. Last week’s volatility may be the start of what history tells us is normal. So, what should we do?
The answer is, not overreact to something just because it's been a while since we’ve seen it.
It’s quite possible that this is just a brief correction and stock prices could go up throughout the year. Remember, the economy is strong, corporate profits are high, and taxes are low. The ingredients are there for continued growth. It wouldn’t be a surprise.
On the other hand, investors may continue to feel jittery. Inflation could rise, and with it, interest rates. This may be the start of a larger pullback or correction. That also wouldn’t be a surprise.
Currently, we are still in the second longest bull market in history, but nothing lasts forever. Since we can’t control what corporations will do, or what the Fed will do, or what the markets will do, we recommend sticking to a long-term investment strategy and not to overreact to market volatility.
Remember, market corrections are normal. Since 1928, the market has experienced a correction of 10%, on average, once per year and taking only 8 months to recover. Corrections of 5% were even more common over this time period, happening on average once per quarter and taking only 2.5 months to recover.
In the meantime, please know that IIS Financial Services is here for you if you have any questions or concerns. You can reach us at firstname.lastname@example.org or 207-761-4733. We’ll continue monitoring both the markets and the economy. If changing conditions require changes to your portfolio's, we will contact you.
As always, thank you for the continued trust you place in our office.
The IIS Financial Services Team