How long will the down market continue?

The stock market has been pretty volatile over the last couple of months while the bond market continues to decline as interest rates rise. Now that the mid-term elections have passed, things should calm down a bit. That might not be much comfort if your portfolio has taken losses recently.

We know that, in the long run, the stock market trends upwards. For most investors, their main question right now is when they should expect to see the markets turn positive again. Performance has been mostly sideways for 2018, though the S&P 500 is slightly down for the year. There’s no way to predict the future, but we can look to the past to provide some idea of what to expect moving forward.

Right now, 65% of the stock market is in correction territory, which is defined as a 10% decline from the peak value of the security. The chart below illustrates the last 30 years of market downturns. You can see, based on the drawdown in the market, how many times similar losses occurred as well as the duration of the downturn.

how long will the market downturn last

Looking at the history of similar market declines, we can see that a correction like the one we are in happens almost annually. They are often short lived and usually take a couple of months to get past. History shows that a steeper decline translates to a longer recovery.

Right now, a big question is how large the current drawdown will be. Truth be told, no one knows what will happen next. The lesson here is that these turndowns happen. They’re also fairly common but they don’t last. The concern for many is that we’ll experience a large drawdown that could take years to recover from. Therefore, my job is to make sure that your portfolio not only matches your comfort with investment risk, but also the timeframe you have before your reach your investment goals.

As your portfolio manager, there will be times that I make changes to your investments based on market conditions. This could mean moving to cash or stable value funds during market downturns or adding higher risk investments when the market is doing well. What I will not do is attempt to time the market. Taking a client fully out of the market could lead to missing out on a market upswing, while putting someone fully into stocks could be a recipe for large portfolio losses.

My overall approach to investment management is to maintain a core/satellite approach for my clients. This means that I stick with a diversified investment (core) plan for the majority of the portfolio, yet I can allocate up to 20% of the investments based on market conditions (satellite). The main drivers of the satellite investments have been tariffs, tax cuts and isolationist policies. Throughout the year, changes have been made to fit with these conditions.

Barring any major economic news, you shouldn’t expect to see any changes to your managed retirement accounts. For those with managed taxable accounts, year-end tax planning is currently underway. You may see trades placed based on your individual tax situation. Aside from those situations, you shouldn’t see any changes for the remainder of 2018.

I wouldn’t anticipate you any additional changes for the remainder of 2018. If you have investments held elsewhere, you may want to reach out in the next few weeks to schedule a review of your portfolio. If you have any other questions or concerns please pass them along.

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