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Addressing the February 2018 Volatility

It has been said that ‘so goes January, goes the year.’ The January Barometer, devised in 1972, suggests that if the S&P 500 ends higher in January, then the financial markets tend to be higher by year end. If this is the case then one might be pleased after the S&P 500’s gain of almost 6% in January.

Despite a strong January, the first week in February ended with the S&P 500 declining 3.9%. On Monday, February 5, the Dow Jones Industrial Average closed down 4.6%. What can we conclude with January’s gain or what we have seen early in February? We don’t believe anything. We can’t know anything about the future based on one month, let alone one week. The economy is too complex to be reduced to barometers, indicators and weekly results.

What is more important to know is that corrections in equity prices are to be expected, normal and healthy for the financial markets. Corrections, or a decline of 10% or more, occur about once a year on average. We did not see one in 2017, but again those are just averages. May we have one or two in 2018? That is possible, but it is also unknowable. 

Just as corrections are normal, it is also a perfectly normal human impulse to try to get in front of them, and perhaps get out of the way, by changing one’s portfolio in anticipation of them. However, doing so would be an attempt to time the market, which isn’t a time-tested strategy and is more in the nature of a bet.

Global financial markets are certainly ‘high’ compared to the market lows of 2008, but in the long term the financial markets trend higher, reflecting economic growth as it occurs. This is logical and to be expected. Consider the levels you will see 10, 20 and 30 years in the future? Will they be higher than today? The longer your time horizon, the more likely that they will be higher, perhaps much higher than today. Because of this, we focus on investing for the long term despite what may happen in the near term.

The linked document titled ‘Invest for the long term’ is an important piece to consider for long term investors. Notice the period from 1982 to1999. This period was marked by only two periods of declining prices lasting greater than 4 months. Any attempts to time the financial markets in the short term, during this 18-year stretch, would have likely ended in significant permanent loss of growth in the long term. 

This is in stark contrast to the Tech Bubble of 2000-02 and Financial Crisis of 2007-09, separated by only 5 years. Whether expansion cycles are long or short, we can see that expansions are more numerous than declines and that every decline has been followed by a recovery. 

The future - whether the markets will decline further from the previous peak or continue its long-term upward trend - is unknowable, by anyone. Although corrections are inevitable, we can never know exactly when or at what market level a correction will begin. We also cannot say when or at what market level a correction will end once it begins. We do know that however deep or shallow a correction is, it will be temporary, as all corrections have been.

We hope that you find this historical summary to be helpful and, as always, our financial advisors are available to listen, talk and review your portfolio with you.

Written and provided courtesy of North Star Resource Group.

This material represents an assessment of the market environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results.  This information should not be relied upon by the reader as research or investment advice regarding any funds or stocks in particular, nor should it be construed as a recommendation to purchase or sell a security.  Past performance is not indicative future results.  Investments will fluctuate and when redeemed may be worth more or less than when originally invested.  The S&P 500 Index is an unmanaged index of 500 stocks that is generally representative of the performance of larger companies in the U.S. Please note an investor cannot invest directly in an index.  2017190/ DOFU 2-2018

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