Talking Points – February 2020

February 26, 2020 Election Year Market Corrections

With the pickup in volatility and stock market correction, we thought today’s chart was a good look at past election year stock market corrections. Notice that a pullback in past election years of about 10% is very common.

Of course there are many factors affecting markets at any time. The nearly 50% correction in 2008 had little to do with the election in the middle of the Great Financial Crisis.

The reality is in any given year corrections similar to those shown above are common. That can be easy to forget when one is occurring and increases fear levels.

February 24, 2020 – Dealing with Volatility

For the first time in many months stock volatility has increased. Most of this can be attributed to the coronavirus and the concerns it may impact economic growth. In reality there are always many factors working for and against financial markets at any time. The reasons are less important than the actions an investor should, or in most cases shouldn’t take.

Here are a few things to keep in mind over the coming days and weeks:

  • Markets have climbed higher in the past six months with abnormally low volatility. It is one of the longest stretches in history for U.S. stock markets to not have a correction of at least 5%. It wouldn’t be unusual to have several of those in a given year. In fact, a correction of around 10% historically has happened in most years and of course periodically there are periods that get even worse. 
  • There is a large amount of liquidity being supplied to markets and economies worldwide. The Fed here in the U.S., other central banks and China are providing stimulus and keeping interest rates very low.
  • The U.S. economy, while slower than some anticipated, is still growing. The important housing market remains very strong, as do the broader job markets.
  • At Lakeview, we believe that in having a pre-decided risk management plan. It is impossible for anyone to correctly maneuver around every little bump in the market. However, we do think it can prove worthwhile to try and reduce the risk from one of those small and normally frequent corrections from turning into a major loss.
  • Lastly, as we say often, avoid the noise. We believe that there is no reason for you to ever watch financial television. They are there to entertain and grab your attention. This is often done by preying on investor emotions of fear and greed. It is those emotions that are the greatest obstacle to achieving your long-term financial goals.

February 5, 2020 – Frequency of All-Time Highs

For much of 2019, stocks seemed to make a new high every day. While it was not actually that frequent, it was enough for many investors to be concerned about putting new cash into the market. They felt stocks had gone too far, or moved too fast and they had missed it.

While none of us know when the end of this secular bull market will be, we did think that this chart provided some interesting information. With 35 new all-time highs in 2019, the S&P 500 had a somewhat normal year when stocks are in a bull market. Clearly all the years with a zero include bear markets.

Two important messages from this chart. First, bull markets can last a long time and produce many new highs along the way, so don’t assume the top is in. Second, when major bear markets do arrive some type of risk management discipline is very important, as it can take many years before another new all-time high is reached.

Source: Greg Towner, CFA, CMT