As many of you already know, the markets have experienced a rough few days with concerns over interest rates and potential inflation. The Dow Jones Industrial Average closed the day down 1,175 points after Friday’s 665 point loss. The media is already reporting that today was the largest point decline in the Dow Jones Industrial Average’s history! While this is certainly true, the media does a great job of exaggerating the story to induce more panic. We urge you to not fall into this trap.
Even though the market has shed a significant amount of points the last two trading days, in percentage terms, it does not mean nearly as much as it used to. The 1,840 point drop equates to a 7% pullback from the all-time high on January 26th. In the depths of the financial crisis of 2008, 1,840 points would have equated to a 27% loss. If we just go back five years, 1,840 points would have been a 14% move. We urge you not to follow the media’s lead by focusing on the recent point decline. Percentage moves are much more meaningful to your portfolios. Even with the recent pullback, the Dow Jones and S&P 500 are only down 1%-1.5% year-to-date and are still up 15%-21% over the past 12 months.
We would argue this is a healthy move for the markets to bring them back to reality. Exuberance had started to creep in with the last few years’ strong returns. 2017 was a unique year where every single month generated positive returns with very little volatility. The largest pullback was a whopping 3%, while markets have traditionally averaged an 11.5% pullback in non-recession years. Even though it seems daunting, the events of the past few days represent normal market activity. Who knows what the markets will bring in the next few days, weeks and months, but be certain the media will play on your emotions to make headlines. Please keep in mind our time-tested belief that “today’s headlines and tomorrow’s reality are seldom the same.” We encourage you to maintain your diversified allocation in periods such as this.
Feel free to also watch our webcast from last week for more details.
PDS Investment Webcast: 4th Quarter 2017
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