As I write this blog the markets are recovering somewhat from yesterday’s steep losses. The Dow Jones dropped over 750 points (almost 3%) on Monday alone. Over the past seven days the Dow (and most U.S. indices) are off around -5% (not including today’s recovery). This chart says it all. Pretty ugly:
For many investors, sharp downturns like this represent the proverbial “gut check.” In other words, how convicted are they with their investment strategy? Short-term traders and amateur investors sometimes get washed out during periods of extreme volatility and negative returns.
This is not a bad thing. Weeding out “hot” money can create value opportunities and give the markets a chance to once again move higher. Stocks can’t move up in a straight line forever – they have to take a breather. And this has still been a fantastic year by any measure, with most U.S. indices still firmly up double digits for 2019.
Severe short-term losses are never fun, but it’s part of investing just like large gains. The fact that stocks can experience these types of moves is the very reason they are one of the best long-term investments you can make. The risk and reward are inextricably tied. If there were no risk of loss, one would expect long-term equity returns to be more in line with cash and treasury bills.
We balance out this associated risk with globally diversified stock portfolios and fixed income. For example, the Aggregate Bond Index chart over the last seven days looks like the complete opposite of the chart above, with bonds producing strong positive returns.
All this being said, we recognize that we are probably in the later innings of this economic recovery that essentially began in 2009. As economies around the globe begin to cool off it’s natural to experience more market volatility.
When will the next recession hit and how long will it last? Will it be mild or severe? I know I sound like a broken record but these questions are impossible to answer, and thus cannot be timed. And many times the trajectory of the market decouples from the economy in general. This is because the stock market tends to be a leading indicator, or forward looking. It’s not uncommon to be in the midst of a recession and still experience strong returns in the market.
We’re as convicted on our investment philosophy and portfolios as we’ve ever been. We’ll get through whatever the markets have in store for us.