Stock market declines in recent days have put many investors on edge. While economists and professional investors debate whether this is merely a short pause in the market’s long upward trajectory or the beginning of an extended downturn, investors worry about losses in their portfolios. We have said for some time that a market pullback would not be unexpected given the notable gains in stock prices in recent years. We do not think the pullback means that the U.S. economy is heading into recession.
What’s moving the market?
Following an extended period in which the U.S. Federal Reserve (Fed) supported economic recovery by maintaining historically low benchmark interest rates, the U.S. economy has regained strength and the labor market has tightened to levels consistent with full employment. The introduction of tax cuts, coupled with increasing wage gains, raised concerns over higher inflation expectations and the possibility that the Fed would be forced to raise interest rates more quickly than expected—causing the first notable market contraction in about two years to take place on Friday, February 2. The selloff continued on Monday, February 05, erasing year-to-date gains for major equity indices.
Investors have enjoyed a long period of relative calm in financial markets, making the return of market volatility an unwelcome interruption. Although volatility can be unsettling, we’ve seen it before. Market movements of 2% or more have been frequent occurrences at various periods in the past, and declines of 10% or more have historically occurred about every two years.
U.S. corrections generally last around three months and, despite their regularity, the average annual return for the S&P 500 Index over the last 50 years has been 10.05% (as of 12/31/2017). Whether or not the current decline will become a correction is anyone’s guess.
Predicting the direction of short-term market movements is, at best, more art than science. In our view, putting energy into developing and maintaining an investment plan that is designed to help you achieve your goals within a timeframe and level of risk of your choosing is a more prudent approach.
This is the foundation of our goals-based investment strategy. The objective is to create diversified portfolios designed to provide more consistent returns over time. Market environments like today’s serve to remind us how important it is to have a disciplined and well-designed approach. While day-to-day movement in stock prices (both up and down) are par for the course, investors are well served by remembering that daily, weekly, monthly, even quarterly market movements are often little more than noise for a portfolio that has a time horizon measured in years or decades.
This material represents an assessment of the market environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. This information should not be relied upon by the reader as research or investment advice. This information is for educational purposes only. Information provided by SEI Investments Management Corporation, a wholly owned subsidiary of SEI Investments Company.
There are risks involved with investing, including loss of principal. Diversification may not protect against market risk.