Select Page

Headlines Sell Ads, Not Investment Advice …

Stock market corrections are not fun when it feels like the sky is falling or that this time is different than past sell-offs.  Guess what?  There have been 23 sell-offs of more than 5% over the past 10 years.   The average decline has been 9.3% and lasted 42 days before bottoming.  The median episode lasted 26 days and lost 8.4%.  There have been 3 declines greater than 14% with the worst being down 21%.  (source Charlie Bilello).  This decline is now in its 3rd week.   US stocks are down nearly 9.5% down from recent record high prices.  What we are seeing is not unusual.

What is going on?  Fear has taken over.  Investors are focusing on worries about rising rates, the upcoming election, the trade war with China and the housing slowdown.  There is always a reason to sell if you let emotions and fear hijack your decision-making process.  Spend some time reviewing the graph below from Michael Batnick at Rithholtz Wealth Management.  It is the price of the US stock market over the past 10 years.  Notice the headlines – each at the time was scary.  Volatility followed.  Also, note that the line has been up over time.  Selling due to news or because markets were going down led to missing gains later down the road.

Some of the fear measures we follow especially those for investor sentiment are registering at extreme levels like those in 2015 or even 2008.  This is not 2015 when oil prices collapsed, China and Europe looked to be imploding and the US was on the brink of a recession.    This is not 2008 when we were in the worst recession since the Great Depression.  The economy is growing, corporate earnings are positive.  Investors became too complacent in 2017 and once again in September as stocks hit record high prices.  There was no risk being priced into stocks here in the US.  This led to a quick and nasty sell-off in the 1st quarter of this year and we are replaying the same today.

Fundamentals right now do not matter.  Key price levels for stock markets were taken out to the downside.  This has led to the computer based algos hitting the sell button as well as they de-risk.  Right now, the bears have control.  Selling stampedes like the one we are in now, generally last for 17-25 sessions – we are 15 days into this one (source: Jeff Saut).  It will take time to repair the damage.

I am not sure what the catalyst will be to turn the market.  It could be upcoming Midterm elections or some positive news in the China/US trade war.  Maybe sellers will just exhaust themselves.  With the average US large cap stock down nearly 20% from high prices, volatility does present opportunities.   Do not panic and do not let the media influence your decisions – headlines sell ads not investment advice.  In addition, keep in mind that there are some safety assets like bonds in portfolios that help cushion the downside.

Source:  Michael Batnick, Ritholtz Wealth Management.