After an unusually long period of low volatility, US stock markets fell sharply in recent days. After gaining over 50% in the past two years, including 5.7% in January, the S&P 500 is experiencing an overdue correction (marked by a fall of at least 10%). The cause for this decline is, in part, due to increasing concerns that a strong economy will stoke inflation and cause the Fed to tighten interest rates more aggressively than previously expected.
Market declines of between 10-20% have historically occurred about every two to three years, with an average recovery period of approximately 3 months(1). We believe that this is a normal and healthy adjustment to a market that has gotten a bit ahead of itself. It's important not to confuse the market for the economy. Current economic data does not signal that we are nearing recession. Economies around the world are experiencing accelerating growth; U.S. gross domestic product is now expanding at an annual pace of more than 3%; corporations are benefiting from significant tax cuts and higher profit margins; labor markets are strong; housing activity is robust; and consumer confidence is high(2).
It's at times like these that we are reminded of the benefits of asset allocation and diversification and the folly of market timing.
Our advice is not to overreact to short-term price movements, but to focus on your investment plan and long-term goals. A well-allocated portfolio alleviates the need to constantly adjust investment positions to chase market trends, and can help reduce the knee-jerk reaction to buy or sell in response to the market's short-term ups and downs.
We are always available to review your financial goals and current circumstances to help assure that your investment strategy remains consistent with your goals. You can call us at any time to set up a meeting or to discuss your questions and concerns.
The Outlook Team
Asset allocation and diversification do not ensure a profit or protect against loss. There is no assurance that any investment process will consistently lead to successful results. There are risks associated with investing, including the risk of loss of principal. Only an investor and their financial advisor know enough about their circumstances to make an investment decision. Past performance does not guarantee future results. S&P 500 is an index of 500 of the largest exchange-traded stocks in the US from a broad range of industries whose collective performance mirrors the overall stock market. Investors cannot invest directly in the underlying index.
1) Ned Davis Research
2) Federal Reserve Bank of Atlanta GDPNow