Today, the Dow Jones Industrial Average fell nearly 1,600 points marking the biggest one-day point drop ever (though the 4.6% decline is nowhere near the worst on record). Since closing at an all-time high less than two weeks ago on January 26th, the S&P 500 has now fallen 7.8%. We’d like to put the recent market decline in perspective as we help digest this sudden change in direction after an extended period of a rising market with little to no volatility.
A Remarkable Run
With last Friday’s market decline, the longest streak in the history of the S&P 500 without a 3% pullback came to a close. As the chart below shows, we have now experienced (past tense) the end of the calmest period for the stock market EVER, and what a strong period it has been.
Today’s market move brought an end to the S&P 500’s 578 calendar day streak without a 5% decline from a closing high. The run of over a year and a half ended today will go down as the S&P 500’s second longest streak without a 5% decline on record. The only streak that was longer was the 593 day streak stretching from late 1957 through the summer of 1959.
We’ve still yet to experience a 10% pullback in the S&P 500 since the beginning of 2016, now sitting at 725 days, the 9th longest such period in S&P 500 history.
With the recent return of volatility, it is important to revisit historical intra-year volatility as a reminder of the risk involved with investing in the stock market. While the recent lull in volatility may have created what feels like a “new normal”, the last few days have served to remind us that investing in stocks does involve risk and the ups and downs are actually normal – not a market that rises on what seems like a consistent daily basis.
The following chart reflects the calendar year returns for the S&P 500 since 1980. Over this period, the average decline per year has been 13.8%. That’s right, from the high point to the low point in each and every year on average, the market drops nearly 14%. Has this historically spelled doom? Hardly. Instead, of these 38 years, the market has finished positive 29 years or more than three quarters of the time.
With the recent return in NORMAL volatility, what, if anything should you do?
For most people, the answer is actually nothing. However, if you are concerned that the stock allocation of your portfolio may have declined quite a bit over the last few trading days, now may be an ideal time to consider your asset allocation and in particular how much stock you own.
While it is human nature to want to participate in the market upside, it is of utmost importance to remember that this is not a one sided affair. The market is still up strongly over the last one, three, and five years, and we believe will likely recover from this downturn sooner as opposed to later.
So, instead of thinking of the recent downturn as a major cause for concern, instead take a deep breath. Consider how far the market has come, what is normal, and what risk is appropriate for your individual situation.
At Republic, we will be monitoring the market as well as our strategy allocations and will not hesitate to take action to protect portfolios should market conditions dictate.
As always, the Republic team remains available to discuss your individual situation and evaluate whether any changes may be appropriate.
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