Today’s Stock Market Decline – Let’s Put This In Context

It’s barely been a couple of hours since the Dow Jones Industrial Average closed down almost 1,200 points and the media is jumping all over the news. Here are some of the headlines:

“Dow plunges 1,175 points – worst point decline in history” – CNN Money
“Wall St. plunges, S&P 500 erases 2018’s gains” – Reuters
“Dow closes down nearly 1,200 points after plunging more than 1,500 points in volatile trading” - The Washington Post
“How To Survive The Stock Market Pullback” – Forbes

Every news headline has a picture of some guy with his head buried in his hands and a graph looking like Thelma and Louise driving off a cliff.

I’m so frustrated!

While all market declines are unpleasant, the media makes us all uncomfortable with these sensational headlines and images.

Let me point out a few things to put this into context:

Points don’t matter – It’s true that this is the largest point decline in history, but remember that the stock market indices are in the 25,000 range. A 1,175 point drop in 2003 (when the Dow was around 8,000) would have been a 14.7% decline, today it amounts to only 4.1% in losses. As far as percentage declines, today does not even show up on any “worst of” table I can find.
We gave up recent gains – The stock markets performed quite well in January, with the Dow increasing 1,430 points for the month. Friday and Monday gave back those gains and a little more, leaving us at the same market levels we were at 60 days ago.
Worries are coming from positive news – This stock market selloff seems to stem from excellent economic news. Huh? The worry is that the economic and tax environment is so good that employers will have to pay higher wages that will reduce profits and spark inflation. This can cause the Federal Reserve to raise interest rates faster than expected. Should we be rooting for bad economic news?
Client investments are not 100% in the stock market – If you were fully invested in the stock markets today, you saw declines in the 4%+ range. Even my most aggressive clients are nowhere near 100% in stocks - they are closer to 60%. My conservative clients have between 15% and 30% in equities, so they even better protected from large declines in their account balances.
Market declines are normal – We have not seen “normal markets” for quite a while. We were spoiled for a while, as the S&P 500 did not decline by more than 2% on a single trading day in all of 2017. There were five such days in 2016, six in 2015 and four in 2014 and these were also historically low numbers. 2011 was more normal; in that year there were 21 trading days in which the S&P fell by more than 2%.

None of this is to say that today’s news is a non-event or that we are not heading for a bear market. Many will predict gloom and doom, but nobody can predict the future. The good news is that client portfolios were repositioned months ago to reduce stock market exposure. I continue to analyze client holdings to see how they are performing; most are providing the diversification benefits they are supposed to provide. Your fixed income holdings barely moved at all today and most alternative investments showed no substantial declines.

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