The stock market started a downturn late last week and has continued that decline today. The S&P 500 was down 113 points today, or 4.1%, and down 224 points from its closing high of 2,873 on January 26. This represents a 7.8% decline in a matter of days.
While nobody could have predicted this type of decline, or its speed, it isn’t terribly unexpected. The stock market has been on a phenomenal run since March of 2016 and investment portfolios have benefited from that. This pullback takes the market back to slightly below the end of 2017.
This really means that a diversified portfolio of stocks and bonds is probably back to even for 2018. The context of “just giving up the last month’s gains” can help you feel a little better than thinking the stock market just went down 8% in a couple of days. Investors should remember that this is a normal part of the investment world, even if it was a quick and steep downturn.
The cause of decline appears to be a growing concern over the rapid rise in interest rates. The US 10-year Treasury bond started the year off yielding 2.41% and reached as high as 2.88% today, before coming back down to earth to finish at 2.70%. The market appears to believe that continued corporate profit growth, coupled with rising wages, will result in higher inflation and the need to raise interest rates faster. This belief caused investors to push up the 10-year yield very quickly, and that likely caused some stock investors to worry about how this will affect the economy.
The economy still appears to be on solid footing with 200,000 jobs created in January and companies reporting better than expected fourth quarter earnings. Corrections like this happen all the time and often are just a head fake. The old saying is “The stock market has predicted nine of the last five recessions!”
So what does it all mean to you? Likely nothing. The prudent thing to do is stay put. We were using excess cash to rebalance portfolios all of last year and will continue to do so this year. For most people, that means using the cash to buy bonds to keep your portfolio in balance with your target mix of stocks and bonds.
As always, if you have any questions at all please reach out to us so we can help.
Steven Elwell, CFP®