The speed at which stock prices have bounced from one direction to the other so far in 2014 has created a rather volatile scene. In just the first 11 trading days of April, the S&P 500 initially gained 1.0% to a new all-time high, then lost 2.4%, gained 1.5%, lost 3.0% and gained 1.5%. And that was one of the more stable market indices. The net result of these moves is a 1.6% decline in the S&P 500 through April 15.
Though the magnitudes were different, the Dow Jones and NASDAQ moved in similar fashion and are down 1.2% and 3.9%, respectively, during the same period. Going back a little further, from its peak in January to a trough in the first days of February, the S&P 500 index declined nearly 6 percent. At the same time, other asset classes that performed poorly in 2013, such as bonds and gold, advanced.
Some traders were caught off guard by this reversal, but they shouldn’t have been because corrections like this are not atypical. Since 1928, the S&P 500 has generally experienced between three and four corrections of more than 5 percent each year; the pullback in February was the 19th decline of 5 percent or more in the current bull market. Declines of 10 percent or more are rarer, but are still seen nearly every 1½ years, and “bear market” corrections of 20 percent or more are seen roughly once every three or four years. Obviously, these are all averages and the performance of any single year can deviate significantly from historical norms.
After 2013, many investors had forgotten that stocks could actually decline. While 2013 was a banner year for stocks, it was very much a historical abnormality in which equities seemed to ignore bad news (including a federal government shutdown) and rallied most of the year. Now that we’re in 2014, investors have been reminded that market corrections do happen but it does not mean we should pull out now. Though market corrections are rarely welcome, they are a natural part of the overall business cycle and it’s important to take them in stride. Declines also provide an environment to test your risk tolerance and ensure that your financial strategies and asset allocations are aligned with your long-term objectives and appetite for risk.
As professional investors, we’ve learned to seek out the opportunities in market corrections and volatility. Declines often create openings for tactical investing and allow us to invest in high quality companies at attractive prices. And this is exactly our strategy at RF. We are buying and selling in response to these market changes in order to better position ourselves overall. While we can’t always use the past to predict the future, history tells us that having the patience to sit out brief rough patches often benefits our clients in the long run.