“Is it a Crash, or a Correction?”

“Is it a Crash, or a Correction?”

With the stock market decline last week, many were left asking this question. My response is, it all depends on whether or not you were prepared for it. Getting caught off-guard is always more disruptive than something you anticipate.

This past week, the US Market made a saw-tooth decline. We saw as much as a -6% single intra-day decline, a peak-to-trough drop of -10.6%, and a little rebound at the end leaving us down -7.2% for the week (per the S&P 500). Wow! We haven’t seen a week like this in many years.

Events like this get catchy names these days, some are calling this “the mini-crash” or “the dislocation.” Well, I call it a “renaissance” – or a reawakening, at least I hope that’s what it is! I’m calling this a “renaissance” because I am hoping it will be the end of a long sleep for investors. Investors have grown complacent and are out of shape! They have become accustom to smooth and gentle rising markets. 2017 was the lowest volatility year in the US stock market since the CBOE Volatility Index (VIX) was created in 1990 to track it. We haven’t seen significant volatility for 10 years, and that’s a problem.

The lack of significant volatility in the stock market has made many investors  complacent, resulting in portfolios with weak defenses. Perhaps this past week was a fluke and markets will return to the tranquility we’ve grown accustomed to. Or perhaps not.

So What Happened?

A lot of programmed selling happened last week, meaning that computers automatically placed trades when certain prices were reached. An important take away is that it would appear many institutions set very similar trigger points for their programmed sales. This is useful information. I take it as further evidence that others share our belief that US equity prices are high enough to merit heightened caution.

Other influences being cited include stronger economic indicators such as:

  • Wage growth is on the rise, signaling inflation on the horizon.
  • Interest rates are forecast to rise, indicating higher cost of borrowing.

What is good for the economy is not always good for stock prices!

What Should We Do Now?

An extended period of low stock market volatility has caused investment portfolios to suffer a similar effect as an economy free of the cleansing effects of periodic recession. Unhealthy investment strategies which can only survive in the absence of volatility have infected many investment portfolios and complacency has led to a culture of casual risk-taking (referring to investors in general, not HFG clients).

Hockey legend Wayne Gretzky famously said “I skate to where the puck is going to be, not where it has been.” At HFG, our approach to asset management is not reactive, but rather proactive. This means you should not expect an emergency rebalance when the market changes direction. While we will never be able to shield our clients from every market drop, we are confident in the long-term performance of evidence-based value-focused allocation choices.

Is volatility finally back? I can’t tell for sure, but if it is, it will bring opportunity with it.

Ben Messinger, CFP ®

Financial Advisor

 

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