Why did stocks drop so far last Wednesday, and what should we do moving forward?Submitted by Ferguson Financial Inc. on October 23rd, 2014
There has been a great deal of volatility in the market over the course of the past few weeks and it is important to maintain a long term perspective when there are drastic swings in a short period of time. Many may find themselves asking if the swings represent short-term distractions or indications of a longer term economic malaise. As we’ve seen over the past few days, there is an indication that the markets are moderating themselves a bit which is reassuring.
So…Why all of the turbulence last week? There were three key factors which contributed to short term volatility in our markets.
- Ebola: when the news of two health care workers in the United States had been infected by the dangerous virus investor confidence was rattled.
- Europe: The three largest European markets, Germany’s DAX index, the U.K.’s FTSE and France’s CAC 40 all saw slips in the neighborhood of 3%.
- There was also a quick flight to Treasuries on Wednesday, which was, perhaps the most disturbing contributing factor. The yield on the 10 year note had not dipped below 2% in 15 months, and though it did rebound, the 10 year yield has fallen about 1% in 2014 which was not expected by Wall Street.
In the thick of last week’s concerns there did come a voice of reason however; Perhaps the wisest words came from Cornerstone Wealth Management CIO Alan Skrainka, who told USA TODAY Friday: “The market was overdue for a correction. Not every correction develops into a bear market. Every economic slowdown is not a recession. Look for opportunities and maintain a long-term perspective.”1 As we are investing for the long run, it's important to keep a long-run view and not overreact to every bump in the road, although we remain ever vigilant to client’s investments and portfolios.
Looking forward we need to be mindful of the following:
Beware those four little words, “This time it’s different:” They are perhaps the most dangerous words an investor can believe in. If you believe “this time is different,” you are mentally positioning yourself to exit the stock market and make impulsive, short-sighted decisions with your money. This is the belief that has made too many investors miss out on the best market days and scramble to catch up with Wall Street recoveries.
Stock market investing is a long-term proposition – which is true for most forms of investing. Any form of long-range investing demands a certain temperament. You must be patient, you must be dedicated to realizing your objectives, and you can’t let short-term headlines deter you from your long-term quest.
If stocks correct or the bulls run away, keep some perspective and remember how things have played out through some of the roughest stretches in recent market history.
Don’t let the gloom dissuade you. Remember 2008? Stocks were supposedly down for the count. You had people who believed the Dow would fall below 5,000 and stay there. They were wrong. Seasoned investors like Buffett knew that measures would be taken to repair the economy, restore confidence and right the markets. As he noted in an October 2008 New York Times op-ed piece, “To be sure, investors are right to be wary of highly leveraged entities or businesses in weak competitive positions. But fears regarding the long-term prosperity of the nation’s many sound companies make no sense. These businesses will indeed suffer earnings hiccups, as they always have. But most major companies will be setting new profit records 5, 10 and 20 years from now.”2
A recovery from a Wall Street downturn usually doesn’t take that long. The bear market of 1987 – the one that came with Black Monday, the worst trading day in modern Wall Street history – was over in three months. The bursting of the dot-com bubble set off another bear market in 2000 that lasted a comparatively long 30 months – definitely endurable for an investor focused on long-term goals.3
We’re looking at a turbulent stock market right now. This is the time for patience. Withdrawing money from a retirement savings account (and the investment funds within it) might feel rational in the short term, but it can be hazardous for the long term – especially since many Americans haven’t saved enough for retirement to start with. A recession is a few quarters long, not the length of your retirement; a bear market may right itself faster than presumed, and you want to be invested in equities when it happens. If you have questions about your money when jitters hit the market, turn to the financial advisor you count on as a resource.
1 - usatoday.com/story/money/markets/2014/10/10/stocks-friday/17022819/ [10/10/14]
2 - forbes.com/sites/greatspeculations/2014/02/04/where-to-get-greedy-now-that-others-are-fearful/ [2/4/14]
3 - nbcnews.com/id/37740147/ns/business-stocks_and_economy/t/historic-bear-markets/#.VDSESBbgVUI [10/7/14]