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Stock Market - Wild Ride

February 28, 2020
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Stock Market – Wild Ride

What a week it has been in the stock market – wow!  It is important to keep some things in mind when we witness market pull backs like this.  We hope the following important reminders will help you navigate what may undoubtedly feel like an endless fall.

As the old saying goes, what goes up must come down.

Various sources suggest that 2019 marked the 10th year of a bull market – the longest bull market in history.  Ask yourself this question: At what point is it ok for the stock market to come down?

Investor vs. Trader

About the only thing in common between an investor and a trader is attempting to make a profit in the financial markets.  In general, investors seek larger returns over an extended period through buying and holding. Traders, by contrast, take advantage of both rising and falling markets to enter and exit positions over a shorter timeframe, taking smaller, more frequent profits.  Ask yourself this question: Are you an Investor or are you a Trader?

Stock Market Correction and Bear Market Defined

There is no universally accepted definition of a correction, but most people consider a correction to have occurred when a major stock index, such as the S&P 500® index or Dow Jones Industrial Average, declines by more than 10% (but less than 20%) from its most recent peak.

Bear markets are defined as periods with cumulative declines of at least 20% from the previous peak.

There have been 22 market corrections since November 1974, and only four of them became bear markets (which began in 1980, 1987, 2000 and 2007).

Ask yourself this question: Are we heading into a bear market?  Personally, we cannot predict if this is where we are headed.

While bear markets can be uneasy, they are a part of long-term investing and can be expected to occur periodically throughout every investor’s lifetime.

 However, it’s important to keep bear markets in perspective. Since 1966, the average bear market has lasted roughly 17 months, far shorter than the average bull market. And they often end as abruptly as they began, with a quick rebound that is very difficult to predict.

The following graph (while difficult to read) illustrates this very point.

 

Source: Schwab Center for Financial Research with data provided by Bloomberg. The market is represented by daily price returns of the S&P 500 index. Bear markets are defined as periods with cumulative declines of at least 20% from the previous peak close. Its duration is measured as the number of days from the previous peak close to the lowest close reached after it has fallen at least 20%, and includes weekends and holidays. Periods between bear markets are designated as bull markets. Indices are unmanaged, do not incur fees or expenses, and cannot be invested in directly. Past performance is no guarantee of future results.

Your Portfolio

Remember that we setup your portfolio allocation keeping in mind your appetite for risk, your investment goals, your investment time horizon, your spending requirements, your liquidity needs, and your income expectations.

Your portfolio will absolutely ebb and flow with the stock market.  Ask yourself this question: Do I own a market portfolio?  The answer for most (if not all) of you is No. 

The following graph is for illustration purposes only.  It illustrates an index (Dow Jones or S&P 500 or NASDAQ – you pick) vs. a Portfolio with 50% in bonds and 50% in U.S. and International Stocks.

We hope this week has not caused you too much unrest.  Our goal is to help you understand that market pullbacks are a necessary evil with investing.  Our goal is to work together towards the successful accomplishment of your lifetime dreams.

We do not have an opinion about where the stock market, interest rates or business activity will be days, weeks, months, or a year from now.  Our recommendation is to stay the course, do not get overly excited, and call us if you feel uneasy about anything.  We want you to know that we are here and standing with you through this wild ride.

Disclosures:

The information provided is not a complete analysis of every material fact and are subject to change.

Securities and some investment advisory services are offered through Cetera Advisor Networks LLC, member FINRA/SIPC, a broker/dealer and Registered Investment Adviser.

Financial Planning and some investment advisory services are offered through Cameron Thornton Associates, a Registered Investment Adviser.

Cameron Thornton Associates and Cetera Advisor Networks LLC are non-affiliated companies.

The opinions expressed in this letter are those of Cameron M. Thornton, CFP®.  All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy.  All economic and performance information is historical and not indicative of future results.  Past performance does not guarantee results.

Investors cannot invest directly in indexes. The performance of any index is not indicative of the performance of any investment and does not take into account the effects of inflation and the fees and expenses associated with investing.

Dow Jones Industrial Average Index: The Dow Jones Industrial Average is a price-weighted average of 30 significant stocks traded on the New York Stock Exchange and the NASDAQ.

S&P 500 Index: The S&P 500 is a capitalization-weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.

NASDAQ Composite Index: The NASDAQ Composite Index includes all domestic and international based common type stocks listed on The NASDAQ Stock Market.  The NASDAQ Composite Index is a broad-based index.

Websites provided as a courtesy and are not under the control of Cetera Advisor Networks LLC or Cameron Thornton Associates.

Cameron M. Thornton, CFP® is a Representative with Cetera Advisor Networks LLC and may be reached at www.cameronthornton.com or (818) 841-1746.

Citations:

1 - https://www.investopedia.com/market-milestones-as-the-bull-market-turns-10-4588903 [10/16/19]

2 - https://www.cnbc.com/2019/11/14/the-markets-10-year-run-became-the-best-bull-market-ever-this-month.html [11/14/19]

3 - https://www.investopedia.com/ask/answers/12/difference-investing-trading.asp [1/16/20]

4 - https://www.schwab.com/resource-center/insights/content/market-correction-what-does-it-mean [2/27/20]