By the end of February, a modest bout of volatility re-entered the landscape, as investors took note of an upward creep in Treasury bond yields. It’s a reminder that stocks don’t rise in a straight line.
While tranquil periods won’t last forever, one can never try to time a peak or trough in the market. Corrections can come suddenly, surprising even the most astute market observers.
There is no one out there that can consistently call the tops and bottoms in the market, period.
A sudden downdraft in shares can be unsettling for some. We understand that. We’ve heard a correction described as being blindfolded on a rollercoaster. You know there’s a bottom, you just can’t see it.
Early February’s slide saw the S&P 500 Index lose just over 10% in value—an official correction—in just nine trading days. That’s right—nine trading days from an all-time high to a 10% decline which, according to LPL Research, was the quickest on record.
Let’s review the landscape. Moderate economic growth at home and abroad has been fueling corporate profits; analysts have been sharply revising 2018 profit estimates higher (Thomson Reuters); inflation has been low, and interest rates, while creeping upward, remain near historically low levels.
It created an ideal environment for stocks, i.e., low volatility and upward momentum.
However, when you’re priced for perfection, or something near perfection, any disappointments are likely to be amplified.
What sparked the sell-off? Yields on the 10-year Treasury were rising, which began to create a stiffer headwind for stocks.
But what likely would just have been a mild downturn snowballed. As we entered February, speculators who had piled into products designed to take advantage of low volatility were suddenly forced to jump ship, which exacerbated selling pressure in stocks.
Further, computer program trading kicked in, adding to the turbulence.
It points out that making investment decisions during times of emotional duress are rarely profitable.
Walt Bettinger, CEO of Charles Schwab, summed it up well in a timely interview at the end of last year that was published in Fortune and picked up by Money.
“We don’t believe it’s possible for people at scale to beat the market and predict the market and know when to get in and out of the market,” Bettinger said. “Where most individual investors get in trouble is when the market goes down and they can’t stand the pain so they leave. Then they either don’t get back in or they wait until the market’s turned and gone way up and then get back in. That’s what really crushes individual investors.”
We’ve experienced periods that might be described as modestly “painful” since 2010. Admittedly, the 2001 and 2008 bear markets were difficult, but even investors that were fully invested in stocks—something we rarely recommend—were made whole and then some if they didn’t sell out at or near the bottom.
Bottom Line
The early February downturn can possibly be pinned on technical factors and not economic distress. The profit and economic outlook is upbeat, which may have cushioned the downturn.
Interest rates, however, may tick higher. It’s something that could create headwinds in the nearer term, even as profit growth this year is forecast to accelerate (Thomson Reuters). Longer term though, many are confident in the economic outlook.
| Key Index Returns | |||
| Index | MTD% | YTD % | 3-year*% |
| Dow Jones Industrial Average | -4.3 | +1.3 | +11.3 |
| Nasdaq Composite | -1.9 | +5.4 | +13.6 |
| S&P 500 Index | -3.9 | +1.5 | +8.8 |
| Russell 2000 Index | -4.0 | -1.5 | +7.0 |
| MSCI World ex-USA** | -4.9 | -0.6 | +2.6 |
| MSCI Emerging Markets** | -4.7 | +3.2 | +6.5 |
| Bloomberg Barclays US Aggregate Bond TR | -1.0 | -2.1 | +1.4 |
Source: Wall Street Journal, MSCI.com, CNBC, Morningstar MTD returns: Jan. 31, 2018–Feb 28, 2018; YTD returns: Dec. 29, 2017–Feb. 28, 2018; *Annualized; **USD