Do Downturns Lead to Down Years?

Stock market slides over days or months may lead someone with investments to anticipate a down year for their portfolio results. Fear from a coronavirus-induced business downturn has resulted in the greatest and fastest fall of stock prices in American history.

Seeing disappointing prices and projecting poor results coming, many people decide to sell at least part of their stock positions and hold cash on the side. For example, in the worst month of the recent decline in March, money markets added nearly 17 percent to their asset base, when average monthly changes up and down are less than 5 percent.

There will always be times of good and bad financial markets, and good and bad investments within those markets. Assuming that you have a diversified, long-term strategy within your comfort level that allows for informed adjustments as appropriate, and that you collaborate with a knowledgeable professional, that does not mean you will worse off if you stay put. In fact, you very likely can be a lot better off if you’ve created a plan that’s right for you, based on your personal goals, priorities and attitudes toward risk. A realistic snapshot is needed.

Before making changes, you should consider your current situation and whether your needs or goals have changed. The biggest risks are market volatility, recessions and the unknown. Most people prefer risks that are constrained to acceptable levels. They want to protect their assets, generate growth and build consistent returns for financial security and a comfortable retirement to maintain their lifestyle for as long as they live. If you wisely diversified in stocks and bonds, the recent great fall was greatly mitigated for you.

A GREAT FALL DOES NOT PREDICT PERFORMANCE

Don’t be too quick to assume, with the deluge of media pessimism, that outcomes for 2020 and beyond — at least for investors — may not still be favorable. Our exhibit of a broad U.S. market index shows positive returns in 15 of the past 20 calendar years, despite notable dips within the days during a calendar year. Standard frameworks ignore daily market volatility.

U.S. Market Intra-Year Declines vs. Calendar Year Returns
January 1, 2000-December 31, 2019
Illustration of chart:  U.S. Market Intra-Year Declines vs.Calendar Year Returns January 1, 2000-December 31, 2019

Source: U.S. market is the Russell 3000 Index. Largest Intra-Year Decline refers to the largest market decrease from peak to trough during the year. Investing risks include loss of principal and fluctuating value. There is no guarantee an investment strategy will be successful. Past performance is no guarantee of future results. Indices are not available for direct investment. Their performance does not reflect the expenses associated with the management of an actual portfolio.

Here are a few observations we can make from this brief record of recent history:

  • Intra-year declines for the index ranged from 3% to 49%.
  • Calendar year returns improved during each of those intra-year slides. The steepest declines show the most notable recoveries in either the same or following year.
  • In 15 of the 20 years, stocks ended up with gains for the year.
  • Even amid the financial crisis in 2009 where a disaster seemed possible almost day-by-day, a 27% plunge gave way to a 28% gain by the end of the year.

A globally diversified portfolio is positioned in many different markets and impacted by different local events. We know from modern financial science there are multiple dimensions of return such as size, value and profitability operating within the financial markets of each country, of which the U.S. is simply the largest economy. Certainly, financial markets will have different sectors such as technology or energy that perform differently over a normal business cycle.

Markets are especially volatile when significant new information is discovered. Markets are like vast information processing machines that produce prices. Recent news regarding a previously unknown virus evoked memories of the dreaded Spanish flu. That implied a potentially huge negative impact on business profits and economic outcomes. That fear caused market prices to become highly volatile and a modest panic ensued as big firms sold off automatically to cover highly debt-leveraged positions in a progressively cascading effect. As the impact of the perceived risk was better understood and uncertainty reduced, volatility subsided. Prices in markets worldwide have reset themselves at another, lower level. While we are cautiously optimistic, the pricing process will take time to fully work out.

CONCLUSION

You most likely would rather plan forward than look backward. You don’t care to know what went wrong in the past; you want to make the right decisions going forward. That means a balanced diversified investment strategy that aims to anticipate volatility without the need for futile predictions. After all, how many gurus predicted weeks ago a virus from China that would precipitate a chain of events that would virtually shut down the American economy?

Volatility is normal for investing. A long-term focus helps informed investors holding diversified strategies constructed from modern financial science and who collaborate with knowledgeable fiduciary professionals, keep a clear perspective for planning their future.

If you are still reading this, you’ve already endured a lot of risk in recent months. If you’ve wisely planned and smartly added to your stock positions, then stick around for the return.