The S&P 500 and global markets took a steep drop significantly this week, declining -3.26% and -2.41% (ACWX), respectively on Wednesday alone. Stocks were led down by the technology giants, with the Nasdaq falling an even further -4.08%.[1] Many clients and readers are concerned, understandably, but I want to put those concerns to rest.

The last time stocks fell this much in a single day was in February of this year, when the S&P 500 declined -4.1% on February 3. As I write this note—and even factoring-in Wednesday’s 3.26% drop and other declines from this week—the S&P 500 is still +5.16% higher from where it was after the February 3 drop. For investors who panicked in February with the S&P 500’s sharp decline, I believe it would have proven the wrong choice. I think the same can be said about what we’re seeing now.

Steep drops in the stock market are scary, I get that. But, they’re also fairly routine and characteristic of normal market corrections, and do not necessarily signal bear markets. In fact, I would argue that they rarely do, since bear markets tend to start with rolling tops – not steep, scary declines. I see the current market action as a par-for-the-course pullback, nothing more.

The most common narrative circulating the press in the wake of the drop was concern over rising interest rates. Higher rates were said to be putting pressure on stocks, since they threaten to make borrowing costlier and could choke off growth in business investment and consumer spending. The Fed may be moving too quickly, many fear.

But I’m not buying it.

More than any other time in history, the Federal Reserve is telegraphing their monetary policy objectives and making their plans for interest rates quite transparent. At no point, in my view, has the market been taken by surprise by Fed actions. Just last week, Federal Reserve Chairman Jerome Powell remarked that the U.S. economy is experiencing “a remarkably positive set of economic circumstances,” with little imminent risk of recession. Gradually ticking up interest rates is warranted, in our view – not dangerous.

Connected to this narrative is the notion that the sharp uptick in the 10- and 30-year U.S. Treasury yields last week could be spreading concern in the equity market, but I’m not buying that either. Those upticks in yield took place last week, and it’s not as if the market was napping and just woke up to realize that yields were all-of-a-sudden higher. In my view, the stock market prices-in economic events as they happen or before they happen, not after they happen.

My message to investors and readers alike is simple and straightforward: we believe now is a time for investors to remain patient and to stay the course. We see this pullback as a short-term market correction – not the start of a bear market. I’d encourage investors with long-term investment objectives and equity allocations to remain patient and keep cool.

In fact, those were actually the exact words I used in a February 2018 column to investors and readers, when downside volatility took hold and the market experienced a correction to the tune of -10% that lasted about two months. Back then, I was urging investors to remain patient and reminding everyone of the strong, positive fundamentals in the U.S. and global economy. Looking back on that period today, we can see the market has rallied strongly on the heels of surging corporate earnings, strong economic growth trends, and a labor market that continues to improve and tighten. It was an appropriate call to remain patient back in February, in my opinion, and I believe the same is true today.

Bottom Line for Investors

For all we know, the market could continue in correction mode for some time, and that’s ok – corrections are normal, natural occurrences in bull markets. 2016 and 2017 were two years of unusually low volatility, so it makes sense to me that volatility is returning more frequently to the markets. It feels normal.

Famed mutual-fund manager Peter Lynch once quipped that “far more money has been lost by investors preparing for corrections, or trying to anticipate corrections, than has been lost in corrections themselves.”

Indeed, corrections can lead even the most steely-nerved investors to make emotional knee-jerk reactions that adversely affect long-term returns. An investor fearful that a correction may be the next big bear market may sell stocks into the decline, and then get whipsawed when stocks suddenly and convincingly recover. Such mistakes are precisely the ones that can lead to sub-optimal returns over time.

In our view, it is smarter to stay the course and keep focus on the long-term.

Disclosure

1 Google Finance, October 10, 2018, https://www.google.com/search?stick=H4sIAAAAAAAAAOPQeMSozC3w8sc9YSmpSWtOXmMU4RJyy8xLzEtO9UnMS8nMSw9ITE_lAQCCiJIYKAAAAA&q=finance&tbm=fin

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