October 11, 2018 | by James Behr Jr
If you watch the news or view your investment accounts daily, you will be aware that yesterday was a tough day for U.S. equity markets. All the major indices were in the red with the Nasdaq leading the way down 4.08% on the day. There are several reasons that you may hear in the media including, but not limited to, the Fed raising interest rates, trade-war tensions with China, the midterm elections and a possible slowdown in global growth.
The S&P 500 and Dow Jones Industrial Average were both down over 3%. According to Liz Ann Sonders, Chief Investment Strategist at Charles Schwab, yesterday was the 98th daily move of -3.00% or more in the S&P since 1952. Over that same period, the S&P 500 has an average total return of 12.32% and median total return of 13.69% (Total Returns includes dividends). It may seem as if the “sky is falling” or an impending market crash could be looming, it is important to remember that these drawdowns happen more frequently than many people remember. As you can see in the chart below from JPMorgan’s most recent Guide to the Markets, intra-year declines happen almost each year with an average drop of 13.8%. In fact, the S&P 500 has already experienced a 10% drop earlier this year.
Currently, the Russell 2000 and Nasdaq are almost 10% from their all-time highs as of the close yesterday, October 10. The S&P and Dow, however, are only down 5.28% and 5.02% respectively from new all-time highs reached over the past month. As we like to remind all our clients that remaining a long-term investor (5+) years and staying invested for the long-term has historically proven to be a good idea. The chart below is again from JPMorgan. As you can see, short-term (1-year) tends to be more volatile to both the upside and downside yet over the longer term, 5, 10, & 20-year returns are less volatile with equities still slightly outperforming bonds.
One last point to consider is that 4th quarter returns for the S&P 500 have been good historically. Going back 25 years the S&P 500 has returned on average 5.21% during the 4th quarter with 21 out of those 25 years yielding positive returns. Six of those years had quarterly returns of greater than 10%! There are reasons to remain optimistic and the impending earnings season will provide some clarity to how healthy the economy is and how U.S. companies forecast earnings growth over the next year.
It is during market sell-offs similar to what we experienced yesterday that we stress having some downside protection in your accounts. Our structured investments and option writing strategies help to quiet some of the noise during time periods such as these. As always, if you have any questions about your accounts, please give us a call at (610) 825-3540.