I wanted to reach out to address the recent stock market volatility. For the past few months, it seems as if every news headline has been negative and while there are certainly causes for concern, there are some reasons for optimism. Before touching on this, I wanted to reiterate some of my comments from our last letter and discuss our approach to portfolio construction.
I wanted to take a minute to address the most recent bout of volatility in the market. Before addressing the causes for the recent downturn and providing our thoughts, it’s important to remind investors of the benefits of having a diversified portfolio. Different areas of the market will outperform at different times and it can be tempting to wonder, why bother holding asset classes that are not performing as well as others at any given time? The reason is that changes in the market happen quickly, much more quickly than changes in the economy and much more often. In fact, since 1980 the average annual intra-year drop for the S&P 500 is 13.8%, yet the Index has rebounded to finish the year positive in 29 of the 38 years analyzed and averaged an annual gain of 8.8%.
If you’ve been paying attention to the financial news lately, you’re probably seeing a lot of ominous predictions—and they’re usually backed up by some ominous headline. The most simplistic are saying that the bull market has now lasted ten years, so therefore it’s about to come to an end—as if bull markets come with a time limit. Others, equally simplistic, are saying that the market has reached a new high, and, well, don’t markets fall from their all-time highs? This ignores the fact that more than 70% of the time, a new high is followed by another new high—and ultimately, so far in history, every new high has eventually been surpassed by the next one.
You’ve no doubt read that we are experiencing the second-longest bull market since World War II, which started in March of 2009 and has continued without a bear market (defined as a decline of 20%) since. But is that true?
On January 25th of this year, the Dow Jones Industrial Average (DJIA/Dow) passed the 20,000 milestone for the first time ever. Seemingly every media outlet began to host discussions regarding whether investors should get back into the marketplace, how much further stocks can go, and a multitude of other investing-related topics. Continue reading “DOW 20,000 — Does It Matter?”