If the Stock Market is Making You Uncomfortable

It was another ugly day in the market. The S&P 500 dropped 2%. And certain stocks, of course, fell a lot more.

Growth is slowing, and tariffs are coming. Not a great combination.

The stock market entered correction territory a few weeks ago. According to history, it will probably get worse before it gets better. 60% of all 10% declines gave way to a 15% selloff

Today, I want to discuss historical data and how to interpret it. According to the chart below from Torsten Slok, once stocks fall 10%, the economy grabs the steering wheel and takes the market to its final destination. The outcome seems binary. Either we avoid a recession, and stocks are a screaming buy, or the economy hits the skids, and they’re not.

Of course, the paths above are just averages. The reality is that every episode follows its own course. Warren Pies breaks it down for us. The chart below shows all 28 times since 1950 when a recession did not follow a 10% correction. As you can see, it’s all over the place. Puts the average line into perspective, eh?

Warren’s next chart shows what happens when the economy does slip into a recession. The average forward drawdown is twice as bad as the chart above.

Over the last few weeks, I’ve been fairly sanguine about what’s going on in the market. Sanguine might be too strong a word, but I guess I’m in the don’t panic camp, which is where you’ll always find me during a selloff. Take all this with a grain of salt because I can’t see the future better than anyone, but my guess is that we don’t see a bear market.

I’m not minimizing the risk or the feelings you’re feeling right now. If you’re uncomfortable with what’s going on, I get it. I’m uncomfortable, too. But discomfort is one thing; fear is something entirely different. And if you’re genuinely fearful, like one more bad week and I’m going to sell, then clearly you’re taking too much risk. Because the truth is, this is nothing, relatively speaking. The S&P 500 is down 5% ytd. That’s it. It can get a lot worse.

So, if you’re going to freak out if we go down 15%, then it’s better to do something about it now. And that something should be a shift in your overall level of risk, not a complete swing to cash. I’ve written a million times about the importance of avoiding the all in/all out decisions, so I’ll give the final word to Nick Colas, who said it best.

“Getting out is easy, but getting back in is hard. I’ve seen every major market low since the 1980s, and none of them were even remotely obvious.”

If you want to talk to an advisor, we have, in my opinion, some of the best in the business. Reach out. 

If you’re an advisor and you need great visuals to help calm your clients, check out Exhibit A.

And finally, we had a lot of fun with Andrew Beer and Sam Ro on The Compound & Friends yesterday. Check us out! Have a great weekend.