It was a difficult week for investors. Stock markets continued to decline, and bonds also dropped slightly. The S&P 500 fell 5.2%. Global stocks fell slightly lower, with the MSCI ACWI falling 5.7%. The Bloomberg BarCap Aggregate Bond Index continued its decline, dropping 0.1%. The S&P 500 had reached correction levels by falling more than 10% from its high prior to Friday’s rally.
Carson Group Commentary
Global stocks continued to drop this week after hitting new highs just two weeks ago. Declines of this magnitude are common, and your financial plan was built to withstand them. The stock market experiences intra-year declines of more than 10% most years. As time goes on, those declines, so vivid at the time, fade from memory. However, this decline is the main investing topic of the day, and this week’s update will focus on how and why markets are giving up some of their recent gains.
- Fundamentals: Overall investing fundamentals remain attractive. Earnings growth is expected to be strong. Margins are solid. The economy is growing at a healthy pace. The consumer is benefitting from solid wage growth and low unemployment. There are certainly risks, but the overall investment climate remains positive.
- Catalyst: An increase in wage growth was the catalyst for the downturn. As the accompanying chart shows, wages spiked in January after increasing at a gradual pace. This is the first time in more than a decade that markets have corrected based on concerns the economy was growing too fast, rather than too slowly. Bonds and lower-risk stocks, which often outperform when the economy is growing slowly, haven’t provided the same cushion in this decline.
- Cause: While wage growth was the catalyst, this week’s sharp decline stemmed from individuals and asset managers investing more in stocks to take advantage of the extremely calm markets. Individuals gradually boosting their stock allocations and asset managers investing in strategies that benefit from low volatility reduced risk when volatility spiked by selling stocks, and that pushed the market lower.
- Volatility: The volatility we are experiencing will likely continue. That doesn’t mean markets will go down, but we should prepare ourselves for big moves higher and lower. We should also expect more swings throughout the day. Volatility tends to come in clusters, and we are coming out of a period when markets were unnaturally calm.
- Emotions: Successful investors manage their emotions. When describing the decline, financial advisors should discuss market moves in terms of percentages, rather than points and dollars. Point declines matter based on the value of the index, and percentages are much less emotional than dollars. Watching lots of financial news can also create challenges. The Olympics or the four consecutive hours of Gunsmoke on TV Land every weekday are excellent alternatives.
- Strategy: Most people reading this have a financial plan that is well situated to tolerate higher levels of volatility than we have seen so far. Investors get hurt when they emotionally react to a market decline by pulling themselves out of the market with no plan for getting back in. Often, the real losses come from not participating in the rebound as there is no plan for when to reinvest the money. Any changes should be made in a strategic fashion and with advice from your financial planner.
Key points for the week
- Many global stock markets reached correction levels by falling more than 10% before rebounding on Friday.
- Fundamentals remain strong, although inflation risk is higher.
- Successful investors manage their emotions.
Fun story of the week
Olympic athletes never fail to bring us some of the most amazing stories, and the very first African bobsled team is no exception. Seun Adigun, captain and creator of the team, and two teammates quit their jobs to try out for the Olympics and make history. Adigun created a GoFundMe describing the team’s goals and constructed a wooden trainer bobsled herself. Not only did the bobsledders enter into the trials, they qualified. This is one of the most intriguing stories in the Winter Olympics and caught the eye of some big-time sponsors, including Visa and Under Armour, who are funding their trip.
This newsletter was written and produced by CWM, LLC. Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly. The views stated in this letter are not necessarily the opinion of Cetera Advisor Networks LLC and should not be construed directly or indirectly as an offer to buy or sell any securities mentioned herein. Due to volatility within the markets mentioned, opinions are subject to change without notice. Information is based on sources believed to be reliable; however, their accuracy or completeness cannot be guaranteed. Past performance does not guarantee future results.
S&P 500 INDEX
The Standard & Poor’s 500 Index is a capitalization-weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.
MSCI ACWI INDEX
The MSCI ACWI captures large- and mid-cap representation across 23 developed markets (DM) and 23 emerging markets (EM) countries*. With 2,480 constituents, the index covers approximately 85% of the global investable equity opportunity set.
Bloomberg U.S. Aggregate Bond Index
The Bloomberg U.S. Aggregate Bond Index is an index of the U.S. investment-grade fixed-rate bond market, including both government and corporate bonds.