Short-term market movements are unpredictable. That may sound like a blinding glimpse of the obvious, and likely something you have heard countless times and possibly shared yourself a time or two. Hopefully you agree that short-term market movements are truly unpredictable but understand what it really means – no one can accurately and consistently predict what the stock market is going to do over a short period of time. 2018 was a good illustration of this, as rapid movements in the market left many short-term prognosticators looking foolish and surprised.
Let’s look back at the year in review and look at years past as well and see that market movements like we just experienced are rather common.
You have seen me share this chart before, but it’s worth sharing again because it reminds us all that market corrections are perfectly normal and are to be expected. As you can see, between 1980 and 2018, the average intra-year decline is 13.9%. What is interesting is that 22 of the intra-year declines have been in the double digits.
What is also interesting is that although 22 of the past 39 years experienced a double-digit drawdown at some point during the year, only 8 of those years ended in negative territory. That means that 64% of the time when stocks fell 10% or more intra-year, they still finished the year with a gain. Clearly, that was not the case in 2018 as the stock market fell intra-year by 20% and ended the year down 6%. With 2018 being the first negative year since 2008, that is a pretty good track record.
Now, we could end this essay here with the comforting perspective that most years the stock market goes up – generally 3 out of every 4 years. All of us hopefully agree with the opening phrase that short-term market movements are unpredictable. So, trying to predict what will happen in 2019…Let’s don’t even go there.
Some of you may be thinking, “Bob, we are in a partial government shutdown; we are on the brink of a trade war with China; interest rates are rising (or they were?); we are nearing an inverted yield curve; we are approaching the 10 year anniversary of this economic expansion; there is dysfunction in Washington; and nonstop tweeting! “Something has got to give, don’t you see, this time it’s different.”
Some of these things are true and some relatively true, but if we are to have a recession or prolonged bear market in the next 12 months, it will be the first time in history that nearly everyone called it in advance. Although you could easily say that 75% of those predictions don’t even count since they have been calling for a financial calamity every year since the last bear market 10 years ago.
Frankly, I wouldn’t be surprised if the stock market moves up or down 20% from here. In order to succeed as a long-term investor, one must understand that stock market volatility is nothing new. Trying to predict (guess?) the direction, timing and/or magnitude of short-term market movements is truly a fool’s game.
In order to withstand the market’s short-term emotional roller coaster, you need a plan and that plan includes an investment strategy that is durable and will withstand the test of time. You need a strategy to see you through the inherent short-term market movements that are so very common but unpredictable.
Now is a good time to remind everyone what we do at Doyle Wealth Management and what we don’t do:
What we do:
- Identify your goals
- Create a financial plan
- Isolate your risks
- Construct an investment strategy
- Manage and monitor your investments
- Make changes when your goals or financial plan requires
What we do not do:
- Get emotional
- Time the market
- Make predictions
- “Go to cash until things settle down”
- Or, anything else that may derail a sound long-term strategy based on short-term market movements
Dear clients, please be invited, and indeed encouraged, to raise with me or any of our investment professionals any questions prompted by this brief essay. That’s what we’re here for.