With the recent volatility in stock prices, many people are wondering about their financial future. Stock prices are down from the highs. Since prices have moved around dramatically from day to day and even within the day, it’s hard to be clear about what current data tells us.
In general, stock prices are down. Depending on when you look, the current prices are about 10 percent lower than the high. Ten percent lower than the high is officially called a market correction. A market correction is normal and healthy.
Are we headed for a recession?
Remember, the worst day each year averages down 13.8 percent from the high since 1980. And the average annual return over that time was 8.8 percent a year. So, a negative number for one day’s market return is not a cause for alarm.
But one has to wonder: Is this period of volatility and this normal pullback in prices the beginning of the end of this bull market? Well, maybe. But all the wise economic experts agree: There is no reason to think that we will enter a recession soon.
Right now, the fundamental economic signals are still favorable:
- Unemployment is low.
- Interest rates are rising but are still at historically low levels.
- Corporate profits are healthy.
- Leading economic indicators are up 6 percent in aggregate for the last year.
More on the leading economic indicators here.
What do economists say about the market?
All the economists I trust agree that we are clearly closer to recession and stock market pullbacks than we have been. They also agree that we are likely to have continued volatility in stock prices before a downturn late in 2019 or after. The next year should offer growth in stock prices, but nothing dramatic.
Stock markets are said to hate uncertainty, so that’s one of the reasons for volatility ahead of the mid-term elections in the U.S. But history shows that most years see a rally after the mid-terms to celebrate the end of uncertainty. So we expect a pretty good market as the year winds down.
The recent falling of stock prices is not “the end.” It’s probably not even the beginning of the end. But we do expect a significant reduction in stock prices ahead. And when it comes, my experts warn that it could be pretty steep. Let me tell you why they believe this.
When I was a kid back in the 1970s, most stocks were owned by professional money managers on behalf of pension funds, insurance companies and other institutional investors. They always owned a mix of stocks and bonds. When they were very enthusiastic about the stock market, they would own 80 percent stocks and 20 percent bonds. When they were very concerned about stocks, they would cut back to 50-50 stocks to bonds. So that was a swing of 30 percent from good to bad.
Today, most Americans own stocks as part of their 401(k) or IRAs. And many times, they have direct control over the investments and can make changes any time they want. Often, modern investors own their investments in exchange-traded index funds. So, when they are very excited about stock, they put 100 percent of their holdings into a stock index fund. And when they are very worried about stocks, they put 100 percent of their holdings into cash. And they can sometimes make those moves more than once a day.
So today, it’s easy to understand how a negative market can create a pretty dramatic tail wind that drives prices down sharply. At least for a while. So don’t be surprised to see stock prices drop as much as 40 percent at some point in the coming pullback.
Remember, stock prices do go up and down. So, even a steep decline in prices does not mean a fundamental change in the long-term value of investments. The long-term stock average annual return is still around 10 percent. That’s using the S&P 500 stock index which has data from 1928 to 2017.
If you have questions about how to prepare your financial plans for the so-called “big downturn,” contact my office at rdunn@dunncreekadvisors.com. I am always happy to meet with people who are working on their financial plans. Dunncreek Advisors does not provide legal or tax advice, nor is this article intended to do so.