Maintaining Perspective in a Selloff
Keeping a balanced view of the markets is one of the primary roles of professional investors. However, we know that the media is almost exclusively covering the negative sides. Because of this, we’ve summarized some important thoughts that should help you maintain a balanced perspective and communicate effectively with your clients.
Stocks for the Longer Run
- It is times like this that we are reminded of why we own stocks at all. Stocks are expected to be the primary return driver of one’s portfolio. However, they can exhibit sporadic volatility, like we’re seeing right now. That is why stocks are most suitable for investors with extended time horizons.
- As of Friday, the five-year annualized return for the S&P 500 is over 15%. This five-year path includes a -19.5% pullback in 2011, a -9.9% pullback in May of 2012, a -7.5% pullback in November of 2012, and an -8.5% pullback in October of 2014. What does that say to me today? It is that these “abnormal” pullbacks are part of the “normal” path of the market.
What does History say?
- History shows that when the US has a favorable economic backdrop, such as the one we have now, these global patterns of turbulence can quickly lead to strong uptrends. We saw similar markets in 2011, 2010, 1998, and 1997.
- In each of those pullbacks, US markets rebounded quickly and regained new highs within months.
- Furthermore, in each one of those years the markets finished in positive territory despite noticeable intra-year pullbacks.
Remember What is Not being Discussed Today
- There is a disproportionate focus on what’s problematic, not on what’s going well.
- There are plenty of good economic signals in the U.S. market:
- The lending environment is supportive of business and consumer spending.
- Private construction has grown over 13% since one year ago.2
- Existing homes sales are up 10.3% from last year.3
- Additionally, sales tax receipts are showing a healthy 3.25% annual growth rate.4
The Unseen Benefits of Global Instability
Global instability, like the type we are seeing today, can be beneficial to U.S. investors in ways that may go unnoticed.
- When investors seek safety they often push real rates down, which is effectively a stimulus for lending. Mortgage rates dropped down to 3.93% last week.5
- When the perception of risk escalates in foreign stocks investors may seek better returns in the U.S., thus boosting allocations to U.S. stocks.
- A slowing China and a stronger U.S. dollar is a good outlook for low inflation, which is a favorable condition for the U.S. consumers.
Institutional Buyers View this Differently
- While retail investors are wanting to sell, institutional investors view these moments differently. Institutional investors often are the lead buyers because they see markets on sale at a 10% discount.
Final Thoughts:
Having clarity on where the U.S. economy stands is imperative for how to handle these types of pullbacks. The evidence shows that when the economy is at mid-cycle strength, these pullbacks are momentary. While we don’t always know the shape, form, and degree of how they will arrive, it is a normal part of the climb higher. The opportunity lies in how you prepare and respond when they occur.
Sources:
1. Stockcharts.com
2. U.S.Census Bureau
3. National Association of Realtors
4. US. Bureau of Economic Analysis
5. Freddie Mac