Okay, so it wasn’t all bad, but my guess is most investors aren’t sad to see 2018 go. In case you need a refresher, below is a timeline of events and market performance for the year.
The line graph is a representation of the MSCI All Country Index, which basically tracks the performance of the global stock markets. I’ve circled the two major downturns of 2018. We’ve all but forgotten about the correction that occurred between late January into February. And things were relatively calm until the 4th quarter, when the market hit the skids again.
It was bad enough for US large-cap stocks, but even worse for small-caps and international stocks. The only silver lining was that bonds actually held up quite well during the turbulence, mostly delivering positive returns. Which is exactly why we hold bonds.
You can pick your poison trying to explain what led to the correction – trade wars, the Fed raising rates, political instability, etc. But here’s the thing – none of that matters. That 2018 timeline of events above looks like any other year. Every year we, as investors, have a multitude of global crises to contend with. Any of which you could point to as a reason for the market to tank. But the stock market is not concerned with the present, and certainly not the past.
The saying in the financial industry is that the stock market is “forward looking.” It’s the collective conscious of investors trying to anticipate what’s around the corner. The market is a leading indicator, not a follower. It’s usually two steps ahead of the economy. This is not to say that the stock market and economy don’t move in the same direction. Over the long-term when the economy is rocking, the market usually is too. But they can certainly decouple.
Take the 2008-2009 financial crash for example. The economy struggled for years after 2008, yet the stock market was seeing tremendous gains. This is because it’s forward looking, and there was much more upside in stocks than downside during that time.
Another example was after the 2016 Presidential Election. Stocks were shot out of a cannon because of the belief that we might see greater economic growth and lower taxes ahead. At the time, taxes hadn’t decreased and we hadn’t sniffed 3% GDP growth in years. But the market anticipated these moves going forward.
“Future events are usually already priced into the market, that is why it’s so difficult to time the market.”
If I were to tell you at the beginning of 2018 that: GDP growth would top 3%, job growth and wage growth would increase tremendously, and unemployment would reach record lows – would you have guessed the market would go down? Probably not. But the market wasn’t looking at the present, it was anticipating the future.
I don’t mean to suggest that the recent market pullback means we are in for tough economic times ahead. I simply mean that it’s a recognition that we are probably in the late innings of the recovery, rates are rising, and unemployment is at record lows. The market is already pricing this in.
Market volatility is normal, and corrections and recoveries can happen swiftly.
On average, the market fully recovers in four months. This most recently occurred during the market corrections of late 2015 and early 2016. While these recoveries don’t occur over days or weeks – and certainly each correction is different – patient investors are rewarded for riding out the storm.