Market jitters – don’t panic!
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So far this year, markets have been under considerable pressure and continue to experience high levels of volatility. This has resulted in large market swings, both positive and negative. As equity and fixed income assets across the globe decline in unison, it is imperative to tune out the day-to-day headlines and remain committed to the strategy of a personalized financial plan.
Market Declines are More Frequent than You May Recall
While periods of high volatility are stressful, it is important to keep a clear perspective on how often market declines occur. According to Capital Group, since 1952, the S&P 500 has experienced an average intra-year decline of 13.7%. Yet, annual returns have been positive throughout that time in 51 of those 70 calendar years. In fact, during that time, the S&P 500 experienced declines of 10% or more 57 times. These so-called “corrections” occur every 1.2 years, on average. Even intra-year declines of 15% or more have occurred 21 times, or every 3.3 years on average.
These stats are not meant to discount the anxiety that large drawdowns can cause investors in the moment. However, it is important to understand that negative markets are a normal and necessary attribute of long-term investing and certainly not uncommon.
Market Recoveries May Occur Without Warning
In May, the S&P 500 entered into a “bear market” by briefly declining by more than 20% off its recent high. However, even though the market has experienced a large decline, that does not imply that the market will never recover—and when recoveries do occur, they can be swift.
When looking at historical bear markets in the S&P 500 since 1950, the market declined 30% and fully recovered those losses in 1.7 years on average. The market recouped all of its losses in six months or less 40% of the time! Panic selling after a market decline may feel like the safe thing to do because it can immediately stop the bleeding, but doing so can also severely jeopardize your future financial well-being if you miss all or even some of the recovery.
Even though the S&P 500 has rebounded meaningfully off its lows over the past few weeks, it is still a fool’s errand attempting to predict if the stock market has bottomed. Historically bear markets tend to experience large bouts of volatility both to the downside and the upside (the proverbial “dead cat bounce”). However, given the steep and precipitous drop in the bond market, there is reason to believe that significant additional losses here are unlikely.
The decline in the bond market earlier this year is largely attributed to the interest rate increases and the expectation for the Federal Reserve to continue to raise rates over the next year. Currently, the bond market is pricing in a Federal Funds rate of approximately 2.75% to 3% (the current rate is set between 0.75% to 1.00%). This implies that bonds have already been priced at substantially higher rates, potentially limiting the additional downside to bond prices should those higher rates come to fruition.
What to Do? Don’t Panic and Look for Opportunities
While it is usually imprudent to execute large-scale changes to your investment portfolio amid market volatility, that does not mean there are no opportunities.
- In taxable accounts, tax-loss harvesting is an effective method to realize losses that can be used to offset future gains in your portfolio.
- Rebalancing your portfolio is important to ensure that your allocation aligns with your long-term targets.
- If you have cash, the market decline may provide attractive entry points into long-term investments. While it may feel uncomfortable, the best time to add to your investments is when others are the most fearful.
- Roth IRA conversion strategies are most effective after these declines because the price of the securities being converted is momentarily depressed, allowing you to convert more shares with the same tax impact.
As always, prior to making any changes to your portfolio, consult your financial advisor to determine the best course of action for your specific situation.
Jonathan Koop is a Senior Portfolio Manager with Bedel Financial Consulting, Inc., a wealth management firm located in Indianapolis. For more information, visit their website at www.bedelfinancial.com or email Jonathan at jkoop@bedelfinancial.com.