Another Day in the Red

By Edward J. Leach, CFP®, MBA

I spent last week at the TD Ameritrade national conference in Orlando, Florida. These conferences always allow us to network with fellow advisors as well as hear from some pretty interesting speakers. Speakers at the TD Ameritrade conference this year included the following, just to name a few:

  • Ian Bremmer, President of the Eurasia Group
  • Jeremy Siegel (aka the “Wizard of Wharton”), Professor at the Wharton School of the University of Pennsylvania
  • Viola Davis, actress 

More on these speakers to come in the following weeks, but first let me address the last week in the markets.

Having the markets decline rapidly while at a conference with over 2,000 advisors was a pretty interesting experience – you would expect panic.  Instead, it seemed the market downturn brought advisors a sigh of relief.  Why?!  Well, a healthy bull market needs a pullback every now and then – it really is that simple.

However, our emotions and watching our account balances don’t make it “that simple”.  As I write this article the S&P 500 is priced at around 2,726. The last time the S&P closed below this level was January 4, 2018, is priced at 2,695.  The last time the S&P closed below this level was January 2, 2018 (third attempt) …closed at 2,648.  The last time the S&P closed below this level was December 7, 2017 which is about two months ago. This means the S&P’s 20%+ return you experienced in 2017 is still very much intact.  What was lost was the gains we had in 2018.

Yes – it took me three attempts to finish that paragraph until I gave up and waited for the close.  The daily volatility we experienced today can be jarring, but as we put this move over the last several days in perspective keep these stats in mind.

In the last 5 years, the S&P 500 has had only 18 trading days of being down at least 2%, two of those 18 days being this past Friday and today.

The last negative annual return for the S&P 500 was in 2008, at which the point the iPhone was only in existence for a little over a year. Before that, the last down year for the S&P 500 was 2002!

It is easy to watch the daily movements of the market and get caught up in the moment – it is what makes us human. It’s also human to use our recent experience as a baseline for what will happen in the future. When the market is down, we become convinced it’s a hole from which we can never climb out. In academic circles this is called recency bias. Clients are always surprised when I share that the S&P 500 has experienced 9 periods of declines greater than 9% since the bull market began in 2009. The decline of the last few days has not yet reached this level, but we’ve been there before along this journey to recent all-time market highs.

I leave you with this chart of the S&P 500 going back to 1900.  You will notice we have spent the last several years breaking the waterline of the lost decade (2000s).  You will also notice how we have seen this pattern before in the early 1900s, the 40s, and the 70s. All of these long term flat periods were followed by a long-term bull market.  Are we overvalued or are we just playing catch-up?  And if we stop for a moment and look around, has anything really changed in the last few weeks or months?