This week the markets lost some ground. In the scheme of things, it wasn’t much, less than 3% on the S&P 500 Index. By the number of concerned calls I received, you would think we were back in the financial crisis. Investors need to chill out.
Let’s look at things with a longer perspective than just the first three weeks of January. In the fourth quarter of 2013, the S&P was up 12%. For the year, it was up almost 30% and the other averages did as well and some did better. A 10% decline after a runup like that would not be out of the ordinary. I have been expecting a pullback to at least the 50 day moving average, which is around 1,800 and possibly below that.
Readers, we need some sort of consolidation and selling is a perfectly normal and predictable event in the historical life of the stock market. The alternative would be a market that continues to go up, up and away until it was so extended it snapped like a rubber band. It would only end in disaster and a 20-30 % collapse in prices. You don’t want that and neither do I.
At the same time, over in the bond market, you may have noticed that interest rates have taken a breather on their march higher, while gold, which has experienced a 50% retracement over the last year, seems to be gaining ground. That is as it should be.
Nothing goes straight up or straight down. The Ten Year U.S. Treasury note in the space of less than eight months has seen its rate rise from 1.67% to a high of over 3%. It is presently hovering around 2.73%. It could easily trade in a range of 2.50% to 2.75% for several months as it consolidates.
Gold, on the other hand, has also had a very bad year and a bounce back of $200/ounce or more would be entirely normal. Make no mistake: both gold and bonds have entered a bear market that will last several years while the stock market, in my opinion, has entered a multi-year bull market. But nothing goes straight down or up.
I do recognize that many investors have had a hard time moving beyond the losses they sustained during the financial crisis and subsequent stock market meltdown. No one wants to see that happen again. Yet, I believe that was a once in a generation occurrence. It is over four years since those events occurred; the time has come to get beyond it.
If you are still so traumatized that every down draft in the market keeps you up at night reliving the past, then you should not be invested in stocks or bonds, commodities or anything but cash for that matter. Every investment holds risk (and reward). There is no such thing as a free ride where you can earn a good return on your money without risking some loss.
My bet is the market will likely bounce off these levels, if not a bit lower, make a lower high and then come down to a level below where we are today. It’s the cost of doing business in the stock market. Over the course of the next several months any losses will be made up, so I’m content to lick my wounds, take a few paper losses and allow the markets to go through this healthy consolidation period. You should do the same.