What Should Investors Do When Markets Drop? Stay the Course

The dip in the markets earlier this month may have caused some anxiety in investors. Over the course of Wednesday, October 10th and Thursday, October 11th, the Dow Jones Industrial Average and S&P 500 Index dropped more than 5%, marking the largest decline for U.S. equities since this past February.

U.S. equity markets have now dropped for six straight trading sessions – the longest such stretch since November 2016. While no single factor is to blame for the recent pullback, a combination of factors have likely contributed to the decline – rising interest rates, the ongoing trade dispute with China, and elevated equity valuations.

Technology stocks, which have been a significant driver behind U.S. equity market returns over the past several years, have added to the malaise, as the S&P 500’s technology sector has been among the index’s worst performing sectors, with a two-day decline of -6.0%. On October 10th, the FANG group of Facebook, Amazon, Netflix, and Google parent Alphabet sunk 6.0% (a collective drop of $125 billion in market value), which marked the group’s single worst session since at least 2012.

Stay the Course Index performance.JPG

The financial press has run with the headline that the Dow Jones Industrial Average (DJIA) has fallen by more than 1,300 points over the past two days. To the casual observer, such a headline would be cause for concern. While it is true that such a move is notable, the current pullback is far from historic. For further context, the DJIA’s 800-point decline on October 10th marked only the 80th largest single-day decline for the DJIA since the 1950s, according to the Wall Street Journal. Simply put, as major market indices have soared to all-time highs, percentage declines have translated into larger absolute point declines than, say, five or 10 years ago when indices were at much lower levels.

Following the recent selloff, global equities (MSCI ACWI) are now down nearly 7% for the month (through October 11th). The recent market pullback has erased much of U.S. equities’ gains for the year, as the S&P 500 Index now stands 6.9% below its recent September 20th peak (and, remarkably, 5.0% below its January 26th high).

Stay the Course Market from 3 perspectives.JPG

Given anxiety surrounding the markets’ recent pullback, how should investors respond?

 1)       Keep perspective – While the markets’ October selloff may feel out of the ordinary, the reality is that such declines are a common occurrence. Since 1980, the S&P 500 Index’s average intra-year decline was -13.8%, yet the S&P 500 Index was still able to produce positive returns in 29 of the past 38 calendar years.

 2)       Expect volatility to continue – Given the expectation for less accommodative central bank policy going forward as well as the ongoing trade dispute between the U.S. and China, we would expect that volatility will remain elevated relative to what we have witnessed over the past two years, though it should moderate from current levels. 

 3)       Stick with your long-term plan – Investors often feel the need to do something in volatile market environments, although short-term, tactical shifts can severely impair the effectiveness of a prudently designed investment plan that aligns with long-term objectives and risk tolerance.

We continue to believe that investors should be patient and adhere to a well-constructed, diversified investment portfolio anchored to your goals and time horizon. Despite elevated uncertainty, we do not find compelling reasons at this time that would justify overriding our asset allocation methodology.

Do you have questions about the recent market fluctuations? Contact an advisor at Fi3 for more information.