I was up from about 12:30 AM to 2:00 AM last night (or early this morning) imagining this post in my head. Was the stock market keeping me up? No, that wasn’t it. Unfortunately, it was the sound that every parent knows and cringes at the thought. Our 10-year-old daughter was getting sick in her bed. I’ll spare you the details, but let’s just say that it was actually a beautiful December night to open the windows and take out the trash.
The Stock Market is Sick
I’m not going to sugarcoat. The stock market is sick. As of today, the US stock market (measured by the price of the S&P 500) is down about 15% from its high earlier this year. This decline is midway between a “correction” of 10% and “bear market” of 20% or more. The reality is that more companies are in a bear market than not. There are 297 companies in the S&P 500 currently in a bear market (footnote 1). Stocks like Apple, Facebook, Netflix, Philip Morris, AbbVie, Wells Fargo, IBM, and GE have all declined more than 30% from their previous highs with GE falling 60%.
Okay, so we’ve determined that 297 stocks out of 500 are not doing very well. That’s not good. Let’s look at stocks that are performing well (footnote 2). That list is only about 30 companies long, including names like Merck, Abbott, Eli Lilly, and Starbucks. So, the bear market stocks (297) outnumber the bull market stocks (30) by about 10 to 1. In my opinion, this looks like a stock market that is sick even though it has not met the classic definition of a bear market decline of 20%. Bah humbug!
But It’s Going to be Okay
As a parent, I understand that some nights will require special care for sick kids. Some periods will be worse than others - it could be a one-day fever, a bug that keeps them home for a week, or unfortunately even a trip to the ER. I also may or may not know what caused them to be sick. Was it anxiety for an upcoming speech, the special powder mix-in drink with dinner, or the coughing baby at the grocery store? We never know. For now, I feel pretty confident that in a day or 18 days (thanks to winter break) our daughter will make her way back to her 5th-grade classroom. Things will get back to normal.
As a long-term investor and real financial advisor, I understand the following about the stock market and its history.
The stock market will occasionally go through sick times, aka bear markets.
We cannot predict when the market will get sick.
We do not know why the market got sick.
Commentators may say trade wars, taxes, tweets, or interest rates but the reasons from the media tend to be correlations rather than causations.
We cannot predict how long the market will be sick.
If the stock market never got sick, long-term investors would lose their “edge” and would not earn returns better than bonds typical of 10-20 years periods.
The stock market will recover and get back to “normal.”
With the acceptance of these six historical truths of the stock market, there are two things that long-term investors should be focused on for their time and money.
Enjoying time with friends and family during the holiday season.
Embracing the process of financial planning: following an appropriate investment strategy and finding the right balance of spending for today and saving for the future.
I hope you have a happy and healthy holiday, Christmas, and New Year.
Footnotes
1 According to a basic stock screen from Charles Schwab filtering on S&P 500 companies where the current price is 20% or more lower than the previous high.
2 According to a basic stock screen from Charles Schwab filtering on S&P 500 companies where the current price is within 10% of the previous high and greater than 10% one-year growth.