It’s been said that throughout history there have been no situations in which panic has been the best option. We’re reminded of that as we survey the performance of the stock market today as well as over the past few weeks.
The S&P 500 closed at 1862.49 today, down 0.81% over yesterday. Throughout the course of the day, the index was down as much as 2.5% before erasing much of the loss over the last few hours. Looking back roughly a month, the broad market index had dropped 9.84% from its Sept. 19 peak to the low point today, just shy of the 10% required to be considered a technical correction.
Although it’s been a while since we’ve experienced a correction, it’s important to remember that this is not the first time markets have experienced drops of this magnitude. If you look at the markets from a historical perspective, over the past 70 years we’ve experienced pullbacks of 10% or more 27 times – and on average once every 20 months. And each time, the reasons for the pullback are different. The last time the S&P 500 dropped more than 10% was in 2011 during the depths of the European sovereign debt crisis, when the pullback was over 20% from peak to trough. This time around, we‘re seeing global concerns spread to U.S. markets. Extremely low levels of inflation across Europe, paired with slowing growth in the region as well as in China and Japan, have led to fear in markets worldwide. This morning, decreased reported earnings from domestic banks and weaker-than-expected consumer spending reports along with increased fears over the spread of the Ebola virus within the U.S. have contributed to uncertainty in the U.S. economy.
It seems that despite repeated reassurances, each time the markets have significant pullbacks like those we’ve seen in recent weeks, the “this time is different” whispers get louder. And each time we hear that phrase, we acknowledge a certain amount of truth. Each time is different. There are no two days, let alone weeks, months or years in the market that are the same. The worldwide markets and economy are constantly evolving and changing. But just because the reasons may be different doesn’t mean our response should be.
So what’s an investor to do?
Review risk tolerances. We believe that market moves shouldn’t drive investment decisions. Instead they should serve as a reminder to review investment strategy and long-term objectives. Changing asset allocation in challenging times may damage an investor’s potential to meet long-term goals.
Consider rebalancing. Over the past few weeks, accounts have likely seen their allocations shift, and the percentage of assets in some classes may be higher than originally intended. This would be a good time to rebalance back to target and bring the account back to its target risk profile.
Put cash to work. This is also a good time to potentially put excess cash to work. Price-to-earnings (P/E) ratios are at some of the lowest points for the year. No matter which types of investments you choose, putting money to work now allows for buying securities at a lower cost than just a few weeks ago.
It appears that market volatility is back, at least for a while. And while its return may cause some angst and uncertainty, it certainly shouldn’t cause panic. The best approach is to take a rational view of the markets and use this as an opportunity to review risk tolerances, consider rebalancing and put cash to work.
Source: Northwestern Mutual