Most of us remember the story of Chicken Little who ran around screaming, “the sky is falling, the sky is falling” when something frightened her. The phrase "The sky is falling!" features prominently in the story, and has passed into the English language as a common idiom indicating a hysterical or mistaken belief that disaster is imminent. Versions of the story go back more than 25 centuries. Yet, there are many who still employ this phrase to motivate people to action through fear mongering…whether it is logical or not. Unfortunately, it still works.
There have been countless examples of predictions concerning the demise of the market in 2017 and now in 2018. With the changes in the market in early February, the “fore-bearers of the bears” are exulting in the correction. This is what they have been warning us of for the past year and a half, but is it really warranted? Is the recent correction something of substance, or just an emotional reaction to the day’s news of recent interest rate increases and the threat of inflation?
For most students of the market, a 5-10% correction simply indicates an emotional reaction to the news of the day, and not a harbinger of a longer downward trend in the market. We don’t have to look very far back in history to find examples of this type of market reaction to either negative or positive news. One of the best examples was the 2016 vote in the United Kingdom which allowed them to exit the European Economic Union. This vote has come to be known as Brexit. The stock market jolted downward for several days after the vote due to the potential of economic changes which may occur. Once the initial surprise of the vote was assessed, the investing universe realized that sound economics were still in place, and nothing was going to change for the next five years. This enabled the market to continue on its earlier upwards trend. Within several weeks of the vote, the market jumped back into gear, and regained the losses it had given up when the news of the vote became public.
One way or another, news usually has an impact on stock prices. However, different news can hit the markets even before they are officially public or known. They can also induce positive or negative post-news reaction or they can result in not a single stock movement. “The market has some very bad moments immediately following tragic news. Selling drives prices down to a surprising degree. However, when a day has passed, the market recovers from its panic, and sometimes works upward to a higher level.”
What seasoned investors realize is that change is always going to be a part of the market. Sometimes, it is going to be a much broader change than we might expect it to be. But this shouldn’t stop us from keeping our long term investing processes in place, and actively working towards our goals. Here are several thoughts to keep in mind to help gauge your reaction to the markets movements. If the market moves downward 5-10% then it is usually as an emotional reaction to news of the day. If the market moves downward 10-15% it is usually an indicator that a more fundamental economic principle is in play which may continue to negatively affect the market and should be considered in your asset allocation formula. If the market moves downward more than 15-20% this is usually a sign that a recession is in motion and your portfolio should be adjusted to withstand any further decline in value.
The courage and wisdom to withstand volatility is sometimes more of a science than an art. Learning how to eliminate the noise and hype of Wall Street and listen to the facts is sometimes very hard to do. We have been conditioned to believe that Wall Street acts in our best interests, and that we can follow their advice unconditionally. This is absolutely not true. Mark Twain once stated, “It ain’t what you don’t know for sure than can hurt you. It’s what you know for sure, that ain’t so.” Learning who to trust that can help you sort through the hyperbole of Wall Street is the secret sauce that most investors need in order to become successful at investing. You can either do it on your own through trial and error, or find someone who has learned how to do it. We would encourage you to take the shortcut and move away from the Chicken Little’s of the world as quickly as possible, by working with a trusted fiduciary firm.