Stocks have pulled back almost 3% in the first two weeks of August. That’s a minor hiccup in the grand scheme of things. This present decline will most likely continue, but this consolidation is as normal as your Mom’s apple pie.
This month’s market performance has been consistent with historical data. Since 1988, August’s stock market performance has been flat at best. Over the last four years, markets have been down an average of 1.2% in August and that weakness has tended to persist through most of September.
Part of the blame for this sell-off can be pinned on the sharp spike upward in interest rates based on stronger employment and economic data. The U.S. bond benchmark, the ten-year Treasury note, jumped from 2.5% to almost 2.8% this week on more taper talk. Once again, I am warning investors to reduce their bond positions if you haven’t already done so.
At the same time, some national retail companies surprised investors by announcing both disappointing earnings and forward guidance. That soured sentiment and led to worries about an economic slowdown in the months ahead.
Can you see a pattern in this nonsense? The economic data out this week was both good and bad, yet the markets declined despite the news. That tells you the negative bias presently underway has little to do with real data or economic reality and far more to do with a market that needs to take a step back after a great run.
Consider that the S&P 500 Index has had its best seven months of the year since 1997 and the 11th best year since 1929. As of the end of July, that index was up 18.2% (4.9% in July alone). Don’t you think the market deserves to take a break?
So how much of a break am I expecting? For starters, let’s look at this year’s deepest decline on the S&P 500 Index, using its intra-day peak of 1,687 on May 22 to its June 24th intra-day trough of 1,560. That delivered a 7.5% worst case pullback. We could easily see another decline of at least that magnitude.
Now before you panic and sell everything, let me remind you that since you have been reading this column and following my advice, we have weathered far worse declines together than that. Look at your portfolio today. Everyone who has followed my advice is now a lot wealthier than before. Stay put and don’t get spooked. Selling a decline is fairly easy, getting back in is far more difficult in a bull market.
So rather than try to time the market, let’s take a longer-term view. Historically, if I look back at all the years the S&P 500 gained at least 15% through July, the index has always consolidated in the following few months. Since 1945, August was a down month over half the time. But over the remaining five months of the year, the S&P 500 Index has risen 83% of the time. One year later, the index was up 13.7 % on average.
The moral of this tale is that the numbers support the case for staying invested, as opposed to trying to be cute by trading in and out. The trend throughout the year has been up. Every dip has been a buying opportunity. In times of uncertainty, the markets, more times than not, resolves itself in the direction of the trend. So stick with the trend.
Remember, also, that the talking heads in the media always trot out the perma-bears when the markets are declining and the reverse when markets are climbing. It pays to be a contrarian when this occurs. When they say sell, you know they have already done so and are hoping you will prove them right. Try to